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Down Almost 30% in 2021, is it Time to Buy The Dip in Alibaba (BABA)

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Alibaba Group Holding Limited (BABA) is one of the world’s largest e-commerce companies that operates through various segments, including Core Commerce, Cloud Computing, Digital Media and Entertainment, as well as Innovation Initiatives. It also owns such well-known marketplaces as Tmall, Taobao, AliExpress, Alimama, and others. 

Year-to-Date (YTD), shares of the Chinese commerce giant have tumbled 28.5%. BABA is underperforming its benchmark, the ProShares Online Retail ETF (ONLN), which has lost roughly 8.9% over the same period.  However, the company continues to demonstrate impressive growth, improving its key operating metrics. 

In this article, I will be analyzing the company from a quantitative and qualitative point of view to determine whether it is a good “Buy The Dip” candidate at current levels. 

Recent News

On October 28th, Vertical Group downgraded Alibaba from “Bullish” to “Mixed” amid resource challenges and political tensions that can affect recovery in e-commerce sales. In addition, Citi CEO Jane Fraser expressed concerns regarding China’s economy, as Chinese internet companies, including Alibaba, Weibo, and JD.com, dropped drastically on Friday.

Alibaba’s Quarterly Performance & Analysts’ Estimates  

Alibaba’s revenues for its fiscal first quarter, ended June 30th, 2021, grew 33.8% year-over-year to RMB205.74 billion, missing the Wall Street consensus by RMB2.93 billion. Revenue increased primarily due to 34% growth in its China commerce retail business and due to higher revenues in logistic and international commerce retail businesses. 

Its Non-GAAP net income came in at RMB43.44 billion, up 10% from the prior-year period. As a result, BABA’s non-GAAP EPS increased 12% from its year-ago figure to RMB16.60, beating analysts’ expectations by RMB2.31.  

Furthermore, we can also find other positive signs in its quarterly report, including a 14 million quarter-over-quarter increase of mobile MAUs in its retail marketplaces and a share repurchase program boost by $5 billion. However, the company’s revenue miss contributed to a post-earnings sell-off, pushing BABA’s shares as low as $138.43. 

Currently, analysts have a mixed outlook regarding the company’s next-quarter figures. A $1.96 consensus EPS estimate for the second quarter of fiscal 2022 indicates about a 30% decrease compared to a year prior value of $2.78. Although, BABA’s sales should rise by around 37% YoY to $32.1 billion in Q2FY22. 

Even considering the retreat in its share price, BABA’s valuation multiples remain stretched. For instance, the company trades with an FWD P/E of 17.73x and FWD EV/EBITDA of 14.14x, both of which are well above the sector’s median. Hence, a decrease in the bottom line along with rich valuations could create additional selling pressure on BABA’s stock. Moreover, if the company cannot meet analysts’ consensus in Q2, we may see another post-earnings sell-off.   

How much volatility are options traders expect for the stock? 

Let’s analyze the company from a quantitative standpoint as well. First, let’s consider the November 19th, 2021 option chain to calculate the expected price movement using the options long straddle strategy. Applying this method, BABA stock could rise or fall by about 9% by mid-November from the $170.00 strike price. Also, the ratio between the open call options and put options in BABA’s case is roughly 0.85x, which indicates relatively neutral options market sentiment for Alibaba stock.   

Options Traders Are Selling BABA’s Calls 

On October 29th, the open interest levels for January 20th, 2023, $190.00 call options increased by 6,579 contracts to about 6,600 (source: barchart.com). However, the transaction was made near the bid side, suggesting that options were sold. For the seller of those calls to earn a premium, the stock would need to stay below $190.00 by the expiration date.

In addition, another options trader sold about 8,253 November 5th call options with a strike price of $167.50 on November 1st. For the seller of November calls to collect a premium, BABA stock would need to stay below $167.50 by the end of this week. 

Conclusion 

I remain neutral on BABA stock.  Macro uncertainty remains the key risk when it comes to the stock. Until this shows signs of improvement, I will remain on the sidelines.  Options traders also appear to be neutral on the stock right now,  as evidenced by some traders selling BABA’s call options, aiming to collect the premium when the stock remains below the strike price.

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Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. Oleksandr focuses his trade strategy around “special situations” (such as catalysts, potential acquisitions, or spin-offs) and how to make money from those catalysts, as direct stock purchases, combined with option-based approaches for risk minimization.

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