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Alibaba is sliding

Alibaba’s business is booming but a cooling Chinese economy is putting pressure on the share price.

The company will reveal its third-quarter figures on 28 January, and traders are anticipating revenue of $5 billion(CNY 32.96 billion) and EPS of 87cents (CNY 5.75). That compares with the second-quarter revenue and EPS of $3.36 billion (CNY 22.17 billion) and 55 cents (CNY 3.63) respectively.

Alibaba will report its full-year numbers in May, and investors are expecting revenue of $14.9 billion (CNY 98.14 billion) and EPS of $2.55 (CNY 16.81), and these estimates equate to a 28% jump in revenue and a 20% rise in EPS.

Alibaba is experiencing higher revenues and net income, even though the Chinese economy is cooling off. Beijing is shifting its focus away from an industrial and manufacturing based economy to a more services-focused one, and this will benefit Alibaba as consumerism is holding up relatively well compared with the rest of the economy.

Alibaba’s growth is being boosted by mobile activity, and the company saw a 60% jump in sales on Singles Day (11 November 2015). Jack Ma is using the slowdown in the Chinese economy to expand his empire as spending on acquisitions in 2015 increased aggressively.

High valuation

  Trailing 12M price/earnings Forward 12M price/earnings Price/book value Dividend yield
Alibaba 57.49 27.31 6.03

0%

eBay 10.92 13.52 4.79 0%
Amazon 849.9 131.25 22.1 0%
Nasdaq 100 21.32 17.21 4.22 1.27%

 

The forward-looking price/earnings ratio points to a drop in future earnings and it still has a high valuation compared with eBay. The price/book value for Alibaba backs up the view that the stock is overvalued, even by the technology sector’s standards. The lack of dividend from the company isn’t a major deterrent for investors as they are seeking capital growth.

Earnings vs estimates

Alibaba listed in 2014, and out of the five quarterly updates, the company has a 100% track record of beating revenue estimates, but only a 60% track record of topping the EPS expectations. Volatility can be expected when the quarterly figures are released, and we have seen on average a 5.76% move post announcements, and 60% of the market reactions have been positive.

Short interest is climbing

Since Alibaba reported its second-quarter results, short positions on the company increased by 20%  and the stock has dropped by 12%. Short interest on Alibaba has jumped by 79% in the past year, since then the share price has dropped by 30%.

Banks are bullish 

  Buy ratings Hold ratings Sell ratings
Alibaba 42 5 0
eBay 16 28 1
Amazon 40 7 0

 

Alibaba has the highest percentage (89%) of buy ratings attached to it out of the stocks listed above. Equity analysts have a $96.66 price target for the stock, which is 37% above the current price.

Alibaba is holding above the support at $69 for now, but its trend in 2016 has been to the downside. With the expectation of a pullback in late January, the stock has created a series of lower lows and lower highs for the past month, which points to additional declines.

A close below $69 will bring the support at $65.34 (the 2016 low) into sight. The all-time low of $57.21 will be watched if we get a close below $65.34. If $69 is held, the resistance at $73.32 will remain the barrier to any rallies, and a close above that level will bring $78.88 and $81.50 into play. 

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