Why Alibaba Stock Shares Are a Screaming Buy
Companies / Internet Dec 19, 2014 - 06:44 PM GMTBy: Money_Morning
When I'm not spending time digging through charts and analysis for Stealth Profits Trader, I like to look at some of the broader market elements that might be useful for any investor.
Today, I've found a great opportunity to buy a well-known and heavily traded stock at a great, low-risk price – perhaps even the best risk-adjusted price that we've seen on this stock to date.
I believe that it has even more room to run; indeed, the go-to indicator I relied on to find this bargain is lighting up my "buy" screen, and right now is the time to act…
Let me explain…
Alibaba's Model Is More Than Meets the Eye
Seems like everyone has been writing or talking about the Chinese Internet juggernaut, Alibaba Group Holding Ltd. (NYSE: BABA).
The company has been constantly in the news since well before its September Initial Public Offering (IPO), and our Chief Investment Strategist Keith Fitz-Gerald has had his subscribers participating in this company's historic rise to prominence since last April!
After all, the company really is a conglomeration of e-commerce platforms similar to a combination of Amazon.com Inc. (Nasdaq: AMZN), eBay Inc. (Nasdaq: EBAY), PayPal Inc., and even Google Inc. (Nasdaq: GOOGL, GOOG) search all rolled into one – only a whole bunch bigger.
Throw in a bank and a business-to-business commerce platform and you have an online juggernaut with a whopping 80% share of the world's biggest, fastest-growing e-commerce market: China.
It's that type of promise for financial reward that had investors salivating over Alibaba long before its spectacular IPO.
But of course there are investors who have not yet had a chance to jump into this stock. Given its phenomenal rise, they've every reason to ask "is it too late to buy in?"
My answer is no, and here's why…
Consider Alibaba's Unbeatable Strategic Advantage
I like Alibaba right here more than I ever have, for three specific reasons:
- On the fundamental side: The company's first post-IPO quarterly earnings report has confirmed the pre-IPO numbers, some of which are eye-popping.
- One of my favorite indicators, relative strength, shows that Alibaba is gaining ground while the market falters.
- The stock price is at a technical sweet spot that offers a great entry level for investors or traders.
Let's dig in and see why.
One question in investors' minds has been whether Alibaba can continue to grow, especially in the right areas, like mobile. Alibaba's first earnings release as a public company helped to quell any fears.
Take a look at these impressive highlights showing how Alibaba has reduced its financial/growth risk for investors:
- Revenues for the quarter were up an amazing 53.7% vs. the same quarter in 2013, also beating analysts' aggressive pre-release estimates. Significance: Alibaba's growth is alive and well – even exceeding expectations.
- Earnings modestly outpaced expectations, when adjusted for the one-time expenses associated with stock-based compensation (an effect of the IPO).
- Mobile also showed meaningful growth, with BABA reporting 35.8% of its gross merchandise volume coming from mobile.
In short, Alibaba's post-IPO earnings showed that the business is continuing to grow even faster than expected, showing that the pre-IPO numbers weren't inflated at the expense of current business.
Alibaba's business model in their main revenue arm – e-commerce – is that of connector. This is distinctly different from Amazon which warehouses and ships large portions of their merchandise. This allows Alibaba to run frankly monstrous profit margins.
Indeed, Alibaba's profit margins remain the envy of the tech and retailing world – or any world for that matter!
For comparison, eBay (which has a similar no-inventory model) has a healthy 18.1% net profit margin. Alibaba's operating margins in the most recent quarter were 43.7%. And while that is down from the second quarter's 48.4%, it's still more than double Apple's vaunted 21.9% margin.
While some analysts are wringing their hands over Alibaba's drop in margins, remember that these absurdly high margins are one of Alibaba's main strategic advantages, and a key strategic weapon.
This company can cut prices, make new investments, and pursue many more growth-oriented strategies and still maintain healthy margins! Many would argue that this is precisely what led to this quarter's lower margins. I continue to see their margins, even at the third quarter's reduced rate, as a huge long-term competitive advantage.
The Go-To Indicator That "Clinches It"
A technical indicator that continues to prove its worth is a stock's strength of movement relative to the broader market. It's one of the key components in my technical toolbox.
Stocks outperform or underperform the market for a variety of reasons. And here's the important part – they tend to continue in that over or underperformance in a very reliable way.
Alibaba has outperformed the market since its IPO. But, more importantly, it has strongly outperformed during the markets down periods.
Let's see what that looks like visually.
The chart below shows Alibaba in the top graph, SPDR SP 500 ETF Trust (NYSEArca: SPY) (the S&P 500 ETF) in the middle graph, and the ratio between the two is shown as the yellow line on the lower graph.
When Alibaba is stronger, the lower yellow line slants up; when SPY is stronger, it slants down.
Take a look:
So whether the broader market continues to drop or heads back to the upside, Alibaba's relative strength puts it in a great position to continue to outperform.
Alibaba's position as the market-share leader in the fastest-growing e-commerce market in the world is compelling enough. And a strong argument could be made that although the price of stock is roughly 10% higher than it was at the close of its IPO day, it's an even better risk-adjusted buy today.
Why?
We have new information that has taken more of the fundamental risk out of the equation. We now know, thanks to the third-quarter earnings report, that Alibaba was not playing any pre-IPO tricks like channel stuffing or moving revenues forward to make their numbers look good.
And from a technical perspective, the stock price is a great place for a buy.
Take a look at this price chart:
You can see that the recent low that Alibaba made was almost exactly at the 50% retracement level.
In simple terms, that's the midpoint between the October 15 low and the November 13 high.
This is a key support level that market technicians watch very closely and should prove to be a short- to intermediate-term of price support.
The bottom line: Alibaba is a great intermediate- to long-term buy at any price between $100 and $110.
Great trading!
Money Morning/The Money Map Report
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