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Alibaba’s share price: time to buy the dip?

Alibaba's [BABA] share price hit an all-time high in January, but the stock has been volatile ever since. The coronavirus outbreak saw a steep selloff, but since March traders have been buying back into Alibaba. A resurgence in China's e-commerce market has helped, as have optimistic revenue and earnings forecasts.

Currently, Alibaba's share price is arguably trading at a low valuation, meaning that now could be the time to pick up shares with the potential to break out.

 

 

What's happening with Alibaba's share price?

Since hitting an all-time high in mid-January, Alibaba's share price is down over 5%. That said, the stock has soared over 25% since 23 March, as part of the wider market recovery. It is also trading above both its 50 day and 200-day moving average, suggesting that traders are backing the stock.

However, the share price has only seen circa 9% growth over the last two years, which compares unfavourably to the 57% growth that Amazon, the site’s western counterpart, has enjoyed in the same period. The question is whether there's enough underlying strength for the share price to now break through January's all-time high, and just how far it will go if it does.

25%

Alibaba's share price gains since 23 March

 

What are the growth prospects for Alibaba’s share price?

The company’s revenue and earnings growth look strong and, in the current economic climate, that's no mean feat. The general consensus is that revenues will grow 30% to $83.26 billion this year, and 25.5% next year, with revenues of $104.48 billion. With an outlook like that, there is reason to be optimistic about Alibaba’s share price.

Analysts are forecasting robust earnings of $6.66 a share this year, and $7.57 in 2021. According to Seeking Alpha, a combination of strong earnings and relatively slow growth in its share price means Alibaba’s fundamentals have caught up with the stock’s value. This has resulted in a forward price-to-earnings ratio at the lower end of its historic range. So, as long as earnings remain healthy, Alibaba's share price could be fair, with plenty of growth potential should the Chinese economy kick back into high gear.

30%

Predicted revenue growth this year

 

What does the Chinese e-commerce market look like?

Alibaba’s share price has benefitted from an acceleration in online shopping caused by the coronavirus outbreak. Although there was a slight dip in consumer spending in the midst of the crisis, China’s economy is gradually reopening. Chinese government data released in May showed e-commerce sales have returned to pre-coronavirus levels, up 16% compared to the same time last year.

In June China's biggest one-day shopping event – known as 618 – saw Alibaba pull in a huge $98.52 billion in gross merchandise value. This record-breaking figure seems to point towards a recovery in Chinese consumer demand, which may bolster Alibaba’s share price in turn.

This return of confidence in the Chinese market is behind Raymond James analyst Aaron Kessler’s Strong Buy rating on Alibaba shares. Kessler has a $290 share price target on the stock – hitting this would see a 31% upside on the company's share price as per 22 June’s close.

$98.52billion

Valuation of Alibaba's sales in China's biggest one-day shopping event

 

What do the analysts think?

Analysts are backing Alibaba’s share price. Of the 48 tracking the stock on Yahoo Finance, 18 rate it a Strong Buy and 29 rate it a Buy. An average 12-month share price target of $230.73 would see a 4.5% upside on Alibaba’s current stock price.

From a technical perspective, Seeking Alpha thinks resistance could be found at $231 – the stock's all-time high in January. Hitting that would see a 5% upside on the current share price valuation. Support might be found at $212 – a 3.6% downside.

Obviously, global markets are extraordinarily volatile at the moment. Beijing has already seen another coronavirus outbreak, which could rock investor confidence in Chinese companies, and any missed earnings expectations could see substantial downward price movement. For now, though, the combination of strong earnings and a low valuation make Alibaba's stock one to watch.

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