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Alibaba’s Recent Rally May Only Be Starting
Alibaba’s (BABA) stock may be about to move higher from its current prices. The stock’s valuation at current levels seems compelling at 24.6 times one-year forward earnings estimates. But when adjusting that multiple for its projected 3-year growth rate, one could argue the shares may even be cheap, trading with a PEG ratio of less than 1.
One upcoming catalyst for the company could be quarterly results, which come on February 13 before the start of the trading session. The stock has been a proxy for events in China, from the trade war to the latest coronavirus outbreak. However, should the company be able to beat what is expected to be a strong quarter for the company, it could propel shares even higher.
Some options traders are betting that Alibaba’s stock jumps after the company reports results, and it could mean that shares rise to around $235, a gain of about 6% from its current price of around $221.80 on the morning of February 5.
Strong Quarter Expected
Analysts are forecasting the company will report strong growth in the fiscal third quarter of 2020, rising by 24% to $2.25 per share. Meanwhile, revenue is expected to increase by around 31% to $22.75 billion.
The company has a strong history of delivering better than expected results. Over the past eight quarters, the company has met or beaten analysts estimates eight times in a row. However, the company has been mixed when reporting revenue, meeting, or beating estimates in 6 out of the last eight quarters.
Data by YCharts
Stock Appears To Be Cheap
The good news is that despite the stock’s big move higher from the lows of 2019, the shares may still be cheap, given that it trades around 24.6 times 2021 earnings estimates of $8.98 per share. Currently, consensus estimates are for the company to grow earnings by almost 32% in 2020, by 22% in 2021, and by 26.4% in 2022. It means that the company is forecast to grow earnings at a compounded annual growth rate of 26.7% through 2022, and that gives the stock a growth adjusted PEG ratio of 0.92. A PEG ratio of 1 to 1.5 is generally considered to be reasonably valued. At a PEG of 1, the stocks PE could rise to around 26.7, and that would value the stock at $239.
The potential stock price noted above isn’t that much higher than what options traders see happening. The open interest levels for the March 20 $225 calls rose by almost 7,100 contracts on February 5, to a total of 9,751. The call contracts were bought on the ASK for about $9.35 per share. That means the stock would need to rise to around $234.35.
The technical chart doesn’t seem as bullish as the options market at this point and suggests that the shares may fall first. There is a technical gap that needs to be filled around $213. However, there is a clear trend that has formed in the stock, which indicates shares continue to rise. Additionally, the relative strength index has been trending higher and is suggesting the stock continue to increase longer-term.
Overall, the trends for Alibaba and the options betting seem to suggest that the stock continues to rise over the near-term. At the same time, the reasonable valuation and expected growth rate appear to indicate the stock could increase longer-term.
Alibaba is Selected in Our Category Emerging Market with a 5 star Rating (out of 5) for the Long-Term. Check out the other companies selected in our selection list and report Emerging Markets now and don’t miss out on new chances the market will present.