Alibaba stock has been on a sharp downtrend since November even as the former China leader continues to deliver strong earnings and sales growth. Increased regulatory scrutiny has weighed on Alibaba stock and other Chinese stocks in recent months, but BABA stock has started to rally off lows. Alibaba (BABA) is making a case for a bottom, but is Alibaba stock a buy now?
Alibaba said it will invest $15.5 billion in support of President Xi Jinping’s “common prosperity” initiative, which encourages large China-based companies to share the wealth to ease inequality in the world’s second largest economy. According to published reports, the funds will be used to support small businesses and gig workers, among other things.
Food delivery platform Ele.me and grocery store chain Freshippo, both owned by Alibaba, recently met with government regulators to improve safety and labor rights for delivery workers.
Alibaba Stock: Strong Growth
Alibaba on Aug. 3 reported a 22% rise in quarterly profit. Revenue increased 46% to $31.9 billion. Alibaba said it had 1.18 billion annual active customers during the 12 months that ended June 30, up 45 million from the previous quarter. It reported 939 million mobile active users, up 14 million. The company also increased its share buyback program by $5 billion to $15 billion.
Cloud computing revenue increased 29% to $2.49 billion.
The results came after a negative response to earnings in May. Alibaba stock gapped down on May 13 after the company missed Q4 earnings expectations, but revenue growth accelerated for the fourth straight quarter, soaring 77% to $28.6 billion.
Prior to that, BABA stock spiked 9% in heavy volume on April 12 after China regulators fined the company $2.8 billion after an antimonopoly probe. At the time, it looked like BABA stock was ready to break out of a downtrend, but the stock got turned away at its 50-day moving average. It tried to rally above the 50-day line again in late April but sellers knocked the stock lower again.
Alibaba’s Q3 earnings report in February revealed another quarter of strong bottom-line and top-line growth.
Adjusted earnings rose 30% to $3.38 a share. Revenue growth accelerated for the third straight quarter, jumping 46% to $33.9 billion. Revenue for the company’s cloud computing business grew 50% year over year to $2.47 billion.
One day after its earnings report, Alibaba stock jumped 3.5% on Feb. 3 after the company’s fintech arm, Ant Group, struck a deal with Chinese regulators to restructure and become a financial holding company. Ant Group operates a suite of financial products, including the widely used Alipay digital wallet in China.
Sellers Hit BABA Stock
Sellers knocked Alibaba stock lower on Nov. 3 after the $34.5 billion Ant Group IPO, the fintech arm of Alibaba, was suspended in Shanghai and Hong Kong. The decision to suspend the IPO came after Shanghai exchange officials said the exchange would halt the listing due to the company’s inability to fulfill conditions amid changes in the regulatory environment.
BABA stock crashed another 8% on Nov. 10 after Chinese regulators announced new draft antimonopoly rules for China online platforms like Alibaba and JD.com (JD), among others.
Alibaba Stock Fundamental Analysis
It’s hard to find a company with a more impressive track record of growth than Alibaba. The company has a five-year annualized earnings growth rate of 29%.
Expectations were high for Alibaba’s Singles Day annual shopping event in November, China’s biggest shopping day. The company didn’t disappoint as sales nearly doubled from the year-ago period to $74 billion.
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The company has been able to stay in growth mode despite a slowdown in its core e-commerce business.
Alibaba’s business in China looks a lot like Amazon’s in the U.S. Alibaba’s cloud-computing business is showing solid growth, just like Amazon’s booming web services business.
Alibaba’s Composite Rating of 49 (on a scale of 1-99 with 99 being the best) has been hurt by sluggish price performance in recent months.
But for a megacap stock, Alibaba continues to deliver impressive growth.
Annual return on equity of 21% help its top-notch SMR Rating (sales + margins + return on equity) of A from IBD Stock Checkup (on an A-to-E scale with A tops) The Stock Checkup tool quickly identifies group leaders based on a combination of fundamental and technical factors.
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For its current fiscal year 2022, Alibaba is expected to earn $9.53 a share, down 4% compared to 2021. But growth is expected to ramp up in 2023, up 23% to $11.74.
Shutterstock (SSTK) is a top-rated stock in IBD’s internet retail group, according to Stock Checkup, along with Liquidity Services (SSTK), eBay (EBAY) and Etsy (ETSY).
Alibaba Stock Technical Analysis
A 36% pullback for Alibaba stock in the second half of 2018 shook out a lot of sellers in the stock and ultimately served to reset the base count.
After a heavy volume breakout for Alibaba stock in late November 2019, the coronavirus stock market crash brought sellers into the stock. But Alibaba, formerly a member of IBD’s Long-Term Leaders portfolio, soared out of a 24-week consolidation in July.
Last year, Alibaba broke out of a flat base with a 268.10 buy point during the week ended Aug. 28. It rallied for a bit, then started to pull back with the broad market. A new flat base formed with a 299.10 buy point. But an early entry was seen when Alibaba stock gapped up on Sept. 30.
How To Spot Stock Market Tops
Lagging RS Line
Alibaba stock has been on a sharp downtrend since hitting a high of 274.29 in mid-February.
Alibaba’s relative strength line has also been trending sharply lower. A stock’s relative strength line, found in daily and weekly charts at Investors.com, compares the stock’s daily price performance to the S&P 500. An upward-sloping RS line means the stock is outperforming the S&P 500. A downward-sloping line means the stock is lagging the S&P 500.
The bottom line: With Alibaba stock still far off its high and below its 50- and 200-day moving averages, BABA stock is not a buy now because it still has overhead supply to work through. A decisive move above the 50-day moving average on June 25 improved the stock’s technical picture — and aggressive traders might have opted to buy — but gains were short-lived. Even if BABA stock climbs above its 50-day line again, the 200-day line (currently around 229) is another potential resistance level to watch.
Risk averse investors will wait and see if Alibaba can break out of its downtrend and fully form the right side of a base. Renewed signs of institutional buying would help the stock’s cause.
Follow Ken Shreve on Twitter at @IBD_KShreve for more market insight and analysis right now.
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