Why Alibaba Stock Gained 11% Last Month
What happened
Shares of Alibaba (NYSE: BABA) finished up 11% in October, according to data from S&P Global Market Intelligence, as the Chinese tech giant seemed to find support on Reddit's WallStreetBets forum, which has been known for pumping meme stocks like AMC Entertainment and GameStop and causing short squeezes. The company also said it would launch its own cloud server chip, a move that is likely to play favorably with the Chinese government.
The stock gained in two phases during the month before sliding during the last week of October.
So what
Alibaba stock jumped 8.3% on Oct. 7 on a surprising development: chatter on the WallStreetBets subreddit thread. Normally, the stock market chat room focuses on smaller, under-the-radar stocks, but Alibaba shares had gotten cheap enough to attract the attention of a now 11 million-strong group of investors.
Image source: Alibaba.
One poster claimed a 2,782% gain on an Alibaba call option, and a number of posters on various threads argued that the stock is undervalued and deserves to be higher. While the attention from WallStreetBets doesn't change anything about the underlying business or the situation with the Chinese government, it does show that some investors are spying a buying opportunity, after Alibaba shares have spiraled over much of the year on concerns about Beijing's crackdown on tech companies.
Later in the month, the stock jumped 6.1% after the company announced a new cloud server that optimize cloud computing services. The 5-nanometer chips constitute a significant achievement for a Chinese tech company, and the Chinese government is aiming to advance technologies like semiconductors that will give the company independence and a competitive advantage. Alibaba won't sell the chips but will rather use them to serve its cloud-computing customers.
In the last week of October, Alibaba shares pulled back as Amazon and other e-commerce peers reported weak growth for the third quarter.
Now what
According to any traditional metric, Alibaba shares look dirt cheap. They now trade at a price-to-earnings ratio of 16, but investors were spooked by a series of fines and restrictions from the Chinese government, which slapped the company with a $2.8 billion antitrust fine in April and has ordered it to spin off media assets and split up its fintech arm, Alipay, into smaller apps.
The difficult regulatory environment may continue, but there's a point when the risk seems adequately factored in. Alibaba will report third-quarter earnings on Nov. 18, which will shed light on the business's current prospects. A strong report could help drive the stock's recovery.
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Jeremy Bowman owns shares of Alibaba Group Holding. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
