Alibaba: Super Bullish Chart Momentum, Crossed With Bargain Valuation

seekingalpha07-22

Alibaba's conservative balance sheet, bargain valuation, and steady growth forecast support the stock as an attractive investment option.Building trading momentum on the charts points to buyers slowly...

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I know doubts about China's economy are everywhere. I know fears of a Chinese invasion of Taiwan are growing. I also fully understand a stock market correction is getting overdue globally. However, if you can ignore the noise and simply look at the supply/demand data, Alibaba Group Holding ADR (NYSE:BABA) (OTCPK:BABAF) could be set for a nice upmove in price the rest of 2024 and during 2025. That's what the charts are saying to me, anyway. Alibaba is one of the largest Chinese and Hong Kong equities by market capitalization (US$180 billion in total equity value at $75 per share). BABA has a storied history of rapid business expansion, as a top online retailer/finance/services firm in Asia. It's also had to deal with China's changing political power struggles and economic goals over several decades. As I mentioned in my last article effort on the company in January here, the breadth of investment variables for Alibaba's stock were moving from avoid and hold territory toward a list of positive factors favoring bullish views. Luckily, my upgraded outlook to bull came within days of its 52-week bottom in price. Seeking Alpha - Paul Franke, Alibaba Article, January 22nd, 2024 The good news for investors today is the chart pattern is building momentum, while shares are still priced at an inexpensive valuation. To me, this is something of a win-win setup for investors. The low valuation defrays much of the long-term risk of owning a position, at the same time as buyers are steadily increasing in numbers. Another thing I like about Alibaba is its conservative balance sheet, holding US$79 billion in cash and $100 billion in current assets matched against $90 billion in total liabilities. $25.2 billion in annual cash flow was also quite enormous, measured against just $4.4 billion in capital expenditures, for the 12-month period ending in March. Let's review an additional bullish argument to own Alibaba today. Bargain Valuation The business is no longer considered a high-growth darling, like it was right after the IPO in 2014. Yet, Alibaba's valuation proposition is worthy of extra research attention compared to most U.S. and Chinese equities today. Seeking Alpha's Quant Valuation Grade now stands at a \"B-\" reading, which I believe is a little low. Seeking Alpha Table - Alibaba, Quant Valuation Grade, July 19th, 2024 Using basic fundamental ratio analysis, Alibaba shares in 2024 are about as cheap as they have ever been. On price to trailing earnings (reduced to 16x on one-time charges and restructuring expenses), sales (1.5x), cash flow (7.5x), and tangible book value (1.85x), the stock represents something closer to a sound value play than a growth name. YCharts - Alibaba, Basic Fundamental Valuations, 10 Years My thinking is Wall Street analyst estimates for cash earnings growth of 11% starting next fiscal year (in April 2025), from today's low valuation point, could support a rather sizable upmove in the share quote over the coming 12-18 months. Paying 8x EPS for 2025-26 results is a huge discount to the S&P 500 projected ratio above 20x, or the closest U.S. peer Amazon (AMZN) equivalent number of 40x. Seeking Alpha Table - Alibaba, Analyst Estimates for FY 2025-27 (Ending March), Made July 19th, 2024 After the P/E analysis, when we include net debt outstanding (subtracting cash holdings) with equity worth, the enterprise valuation on core EBITDA (5.4x forward) and revenues (1x forward) is equally a bargain pick. YCharts - Alibaba, Enterprise Valuations, 10 Years Compared to other online retailers and cloud leaders in the U.S. and China, Alibaba is trading on the lower end of the EV to trailing EBITDA valuation scale currently. Absent the antagonism between U.S. and Chinese politicians, and low-grade trade friction between the top two nations in the world for GDP size (25% and 18% of global GDP, respectively), I guesstimate Alibaba's valuation ratios would be double the current level. YCharts - Alibaba vs. Online Retailing & Cloud Peers, EV to EBITDA, 1 Year One of Wall Street's favorite valuation yardsticks, the free cash flow yield of 13.3% is approaching the highest rate available vs. peers. In comparison, Amazon is sitting at 2.4% for FCF yield on the price you pay for the stock. YCharts - Alibaba vs. Online Retailing & Cloud Peers, Free Cash Flow Yield, 1 Year One of the investing public's favorite yardsticks is the cash distribution yield. With a regular dividend payment started in December and a special dividend paid in June, Alibaba's 2.66% trailing yield easily trounces the field mostly stuck at ZERO for direct payouts to shareholders. Management has also committed to major share buybacks as a way to return money to owners. Diluted outstanding share counts have declined by 7% over three years. YCharts - Alibaba vs. Online Retailing & Cloud Peers, Dividend Yield, 1 Year Share Buying Momentum So, if you are receiving plenty of underlying value on your investment at $75 per share, when is the stock price going to reverse higher? After declining from over $300 in late 2020, few investors now believe Alibaba will ever rise again. I don't blame them. What has me warming up to BABA today is the result of a review of trading momentum. For starters, a proprietary short-term formula I have been developing screamed buy at Friday's close. This particular quant formula searches for a variety of indicators flashing green at the same moment, based on trading action over several weeks to a month. Plus, during 2024, the Accumulation/Distribution Line and On Balance Volume have performed quite admirably for a stock flat to drifting higher in price. I have drawn the strong zigzags higher for both on the chart below. The ADL and OBV calculations have been remarkably positive, mainly because high-volume down days in price have disappeared. Looking at the 13-day Force Index of buying/selling intensity, the vast majority of large volume days have been on the buy side of the equation since January. All told, shares appear to have entered a building pattern for price, and a turn higher in both the 50-day and 200-day moving averages could take place on any gain above $80 in coming weeks. Such an uptrend has not been a reality since last August. StockCharts.com - Alibaba, 12 Months of Daily Price & Volume Changes Further evidence that overhead supply (sellers willing to dump on share gains) is shrinking can be found on the Renko chart. Renko designs look at the volume necessary to move price at fixed intervals, regardless of the time involved. Using standard settings to draw the chart below, we can see periods of price decline stopped on heavy volume (stretched out over time in Alibaba's case). Thereafter, extremely light volume was able to push price higher again (boxed in green below). This pattern of selling exhaustion being absorbed, with buyers soon able to retake the advantage, is very constructive for future pricing in my research. StockCharts.com - Alibaba, Standard Renko Chart, Since September 2023, Author Reference Points And, with the price stuck below $100 for most of the last two years, a longer-term basing pattern breakout to the upside could usher in a multi-year advance for shareholders. Historically, price basing patterns of a year or more can set the stage for really good things to happen for patient investors. So, as long as price can hold the $60 to $65 range (previous lows since 2022), a bullish outlook seems warranted. StockCharts.com - Alibaba, 5 Years of Weekly Price & Volume Changes Final Thoughts If you are willing to own Chinese stocks, and can handle the outlier risk of downside losses in the -90% to -100% range if a Chinese/U.S. war over Taiwan is our future (assuming the U.S. government makes Chinese business ownership illegal, similar to the punishment on Russian securities with the invasion of Ukraine in 2022), rising dividend payouts and the resumption of investor interest in this area of the world could deliver gains of +100% to +200% in coming years. That's the reversion-to-the-mean thesis for Alibaba, closing the valuation gap with its U.S. peers. What if Chinese economic growth remains solid, while America begins to suffer from its unpayable Treasury debt load? If this becomes our future, you will want to own investments outside of America, with business sales and growth not tethered to the U.S. dollar. In this sense, Alibaba might turn out to be a great diversification selection for your wealth 5-10 years down the line. What about an immediate catalyst for shares? Alibaba is shooting for a dual-primary/secondary listing in Hong Kong by September, which could open share ownership to more mainland China retail investors. An influx of new buyers from this approved primary listing for ordinary shares alone could be \"the\" catalyst for U.S. ADRs to move above $80, kicking off a bull market in U.S.-traded shares. I rate Alibaba ADRs a Buy around $75, and I am looking to reenter a position next week. If you are leery of Chinese-related investment risks, I suggest using a tight stop-loss sell order at a level 10% to 15% under your buy price.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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