Summary
Alibaba shares, like many other Chinese technology platforms, are under increasing regulatory scrutiny
Short-term geopolitical headwinds likely keep BABA stock between $185 and $205 in the near term
However, long-term growth drivers should provide headwinds for BABA stocks
Many Chinese technology stocks, including Alibaba (NYSE:), have not had a good year so far in 2021. BABA stocks are down about 16% so far.
At the end of October 2020, shares of the Chinese internet retail giant hit a record high of $319.32. However, things have gone downhill for the Hangzhou-based company since then. In fact, the stock recently saw a 52-week low of $179.67. Now they hover around $195.
Investors in the e-commerce and cloud technology giant await the release of the company's earnings report on Aug. 3 to better understand what the future could hold for BABA stocks.
We have to keep in mind that the recent sale was not limited to Alibaba. Many Chinese tech names, pressured by regulatory crackdowns on companies in the technology and education sectors, have also seen a rapid decline in 2021. For example:
Baidu (NASDAQ:) — a decline of 24% (YTD);
New Eastern Education and Technology (NYSE:) — down 84% (YTD);
Pinduoduo (NASDAQ:) — down 53% YTD;
TAL Education Group (NYSE:) — down 89% YTD;
Tencent (OTC:) — down 16% YTD.
Current price levels may be tempting for many optimistic readers. However, it is unlikely that Alibaba will make a fresh start in the coming weeks.
Still, there are ways investors can profitably add BABA stocks to their portfolios.
Long-term wind for Alibaba stocks
Founded in 1999, Alibaba is now regarded as one of China's most innovative technology names. It is the largest e-commerce and technology company in China, but its business units also span logistics, digital media and entertainment segments, along with various affiliations in the fintech and artificial intelligence space.
On July 27, CEO Daniel Zhang released a shareholder letter highlighting Alibaba's growing ecosystem of 1.13 billion customers.
In May, the company announced financial results for the and FY21. The gross trading volume (GMV) amounted to RMB 8,119 billion (US$1,239 billion). Zhang stressed that in China, “the annual average GMV per consumer…exceeded RMB 9,200 (US$1,404).”
Chart: Investing.com
50 analysts polled through Investing.com expected BABA stock to outperform. With a median price target of $287.76 for 12 months, that would represent a return of over 45%.
In recent years, investors have been delighted by the growth in Alibaba's cloud business. In FY21, revenue grew 50% year-over-year to over RMB 60 billion ($9.233 billion).
The stock's lagging P/E, P/S and P/B ratios are at 22.16, 4.58 and 3.5, respectively. In comparison, Amazon (NASDAQ:), the leading name in both e-commerce and cloud technologies, has lagging P/E, P/S and P/B ratios of 69, 01, 4.36 and 17.69. So far, the AMZN stock has increased by 11% in 2021.
These statistics highlight the long-term growth potential of BABA stocks, which appear cheaper than AMZN on a fundamental basis. Therefore, combined with revenue and earnings growth in the coming quarters, Alibaba would be one of the leading stocks we would include in a long-term portfolio.
But given the question marks lingering over the magnitude and duration of China's regulatory developments, as well as other near-term headwinds, it may be too early to start a new position in Alibaba stock.
]Short-term volatility is likely to continue
Despite the long-term bullish outlook for BABA stocks, there could be several headwinds for the stock in the near-term, especially between now and the company reports earnings on Aug. 3 . -and possibly until the rest of the summer.
First of all, the geopolitical developments in China coincide with the regulatory situation. The founder of Alibaba, Jack Ma, has been critical of a number of Chinese regulations in the past, especially in the field of financial services.
Many analysts agree that Ma's words led to the cancellation of the proposed IPO (IPO) of Alibaba-affiliated fintech leader Ant Group in late 2020. Ant Group owns Alipay, the leading digital payment group in the country. It is now suggested that Ant Group will become a financial holding company and remain under the supervision of the state-controlled Central Bank of China.
Meanwhile, Alibaba has received an anti-monopoly fine of RMB 18 billion (or US$2.8 billion) from the State Administration for Market Regulation (SAMR). In recent weeks there has been further regulatory pressure on the “ platform economy.”
In recent days, online education groups, such as TAL Education and New Oriental Education & Technology, have also come under scrutiny. In other words, as the authorities tighten their control over large companies in China, it is not possible to become fully optimistic about Alibaba or other Chinese-based technology names in the coming weeks.
In addition, investors viewing technical charts may be interested to know that the BABA stock chart is not yet supporting long-term bullish movement.
Since the end of June, the shares have lost about 15% of their value, providing a better entry point for buy-and-hold investors. Still, there could be a further drop to the $185 level, or even lower.
Although the stock is oversold, momentum indicators can remain oversold for a long time. BABA stocks could potentially trade sideways — especially between $185 and $205 — in the coming weeks until it builds a base around those levels. Only then would a long-term bullish move likely have legs.
As part of the short-term sentiment analysis, it would be important to look at the implied volatility levels for BABA options, which typically show traders the market's view of possible moves in a security. However, it does not predict the direction of movement.
BABA's current implied volatility is 38.1, which is above the 20-day moving average of 31.7. In other words, implied volatility is on an upward trend.
Unknowns from China, as well as charts and options markets urge caution. Given the approaching earnings date, we can expect price fluctuations. Our first expectation is a possible pullback towards $185. In the event of such a fall, long-term investors would find a better value.
2 Possible trades
1. Buy BABA Shares at Current Levels
Investors who are not concerned with daily price movements and who do not want to wait for a possible decline of about 5 to 7% from current levels should consider investing in BABA stocks now.
On July 28, BABA stock closed at $196.01.
Such buy-and-hold investors should expect to hold this long position for several months as BABA stocks may attempt to hit the 52-week high of $319.32.
Assuming an investor enters this trade at the current price of $196 and exits around $300, the return would be just over 50%.
Investors may also consider placing a stop loss at about 3-5% below their entry point.
2. Protective well with an ETF
Readers who are optimistic about Alibaba stock but remain nervous about a possible short-term decline should consider buying a protective put in addition to their stock holdings.
Protective puts are usually done with the stock put option. However, given ongoing regulatory action in China, we would suggest investors buy a protective put on KraneShares CSI China Internet ETF (NYSE:) as a proxy.
For example, the trader could buy an at-the-money (ATM) put option, such as the KWEB September 17 put option with 52 strikes.
This option is currently offered for $3.60. It would cost the trader $360 to own this put option which expires in less than two months. As a result, Alibaba investors who also own stocks would enjoy some protection, especially during the earnings season, in case the Chinese authorities continue to crack down on technology stocks.
Bottom Line
Alibaba has become one of the leading names for e-commerce and technology not only in China but worldwide. Therefore, BABA stocks are likely to deliver significant gains in the coming years. However, there is likely to be more volatility ahead before the next bull leg kicks in.
