Alibaba (NYSE:) has become a frustrating stock to own for long-term investors. On the one hand, it’s a great company with incredible growth. It’s positioned in several secular growth themes in a mega-sized country. On the other hand, BABA stock has been dogged by continuing political issues.
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Those issues are mostly related to the trade war between the U.S. and China. But other reports are simply not in sync with how things work in America, such as the Chinese government putting personnel in many Chinese companies. That causes some concern among investors, wondering how it may or may not affect Alibaba’s business.
The issue for Alibaba stock? It’s listed on the NYSE, operates in China and is caught between a rock and a hard place. Investors are not as familiar with the business as they are with other entities. Many are not used to how politics operate in a foreign land. In my view, these headwinds have hindered Alibaba’s valuation as well.
For those who have the patience, I believe they’ll be rewarded in the long haul. Those that can’t, can — and should — find alternatives in U.S. equities with less exposure to the trade war.
Valuing Alibaba Stock
Alibaba Group is graced with incredible growth, particularly for its size. Commanding a $442 billion market cap, BABA stock is one of the big boys. With companies this size, we rarely see growth rates this high.
Analysts expect revenue growth of 32% to $72.25 billion this year and 29.2% improvement next year. On the earnings front, analysts expect 23.3% growth this year to $6.88 per share, followed by an acceleration to 26.3% growth next year.
It leaves Alibaba stock valued at a rather reasonable 25.7 times this year’s earnings. Given the growth rate, that’s not a bad price to pay at all.
The company’s price-to-earnings ratio is about in-line with Alphabet (NASDAQ:) and Microsoft (NASDAQ:), yet it has superior growth estimates in both sales and revenue for this year and next year. It has far superior growth estimates vs. Amazon (NASDAQ:) too, with the exception of 2020 earnings growth, and BABA stock has a notably lower valuation.
Admittedly, it’s on the low end of the group when it comes to margins. That said, its free cash flow is nothing to scoff at, generating more than Amazon and Facebook (NASDAQ:), and coming in a bit below Alphabet.
Does that mean Alibaba stock should trade at a discount to its mega-cap peers? Maybe. That’s up to the market, not us. But for patient investors, this could prove lucrative. Eventually the trade war will end and Chinese equities may suddenly face a series of tailwinds rather than headwinds.
Just look at the stock price earlier this month , rallying almost 10% from $161 to $177, as progress was made on the trade front. The pullback over the last few days has investors wondering where can it go from here.
Trading BABA Stock
With the latest rally, Alibaba stock not only held its 2019 uptrend support (blue line), but it also reclaimed all of its major moving averages. Because Alibaba stock continues to put in a series of higher lows though, it’s forming a bullish pattern. Known as an ascending triangle, traders will be looking for a breakout over resistance. It may not happen in the next couple of sessions, but so long as the trend holds, investors will be looking for upside.
With this latest Alibaba stock pullback, I want to see if its moving averages can buoy the name. If not, another retest of uptrend support could be in the cards. Below it, and the $150s are possible.
If BABA stock is able to push through resistance, look to see if it can take out last month’s high at $184.13. Above it and Alibaba can push into the $188 to $190 zone. Its 2019 high sits up at $195.72 and will be the next upside target should shares advance above $190.
Bret Kenwell is the manager and author of and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GOOGL.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.