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Alibaba’s Post-Earnings Pullback Shouldn’t Last Very Long

This article is more than 4 years old.

Alibaba Group Holding Ltd. (BABA) shares fell by almost 2% on February 13 after reporting better than expected fiscal third quarter 2020 results. The drop came after the company noted the corona virus is hurting its fiscal fourth quarter. Still, the company has strong growth drivers in place, which should help to propel future revenue and earnings growth, and as a result lift shares, once the spreading virus recedes.

The stock’s valuation is compelling, with it trading around 20 times fiscal 2022 earnings estimates. Additionally, the shares have managed to hold key levels of technical support following the concerning fourth quarter commentary. It would suggest that the path of least resistance for the stock remains higher.

Technical Strength

The stock fell following results on negative comments taken from the conference call surrounding the potential negative impact the corona virus could have on revenue growth in the March quarter. Despite the pullback, the stock has been able to maintain an uptrend that has formed in the shares since the end of January. It appears to be creating a technical continuation pattern known as a symmetrical triangle, and it may suggest that the stock rises to around $250 in the not too distant future.

Additionally, the relative strength index for Alibaba has been trending higher since June. It would suggest that bullish momentum is entering the equity and that the shares continue to rise over the longer-term.

Strong Results

The company delivered strong results for its fiscal third quarter with adjusted earnings per share of $2.61, which was well ahead of analysts' estimates for $2.22. Additionally, revenue for the company was healthy, coming in at approximately $23.2 billion versus estimates of roughly $22.5 billion. In local currency, total revenue grew by 38%, led by the massive growth in its Cainiao logistics services and cloud computing units, which surged by 67% and 62%, respectively.

Currently, analysts see the company’s healthy revenue growth continuing and rising by almost 29% in 2021 to $95.8 billion, while earnings are forecast to climb 22% to $8.89 per share. Given the potential impacts of the corona virus in the fiscal fourth quarter, it is unclear yet how these forecasts may be impacted. However, if it is just a one-time event than the revenue outlook for the next fiscal year may not be affected by much at all. Additionally, the company’s significant revenue growth is expected to continue into 2022, rising by an additional 23.4% to $118.2 billion, while earnings are forecast to grow by roughly 26% to $11.19 per share.

Cheap Adjusted For Growth

With that pace of growth, the stock is trading with an adjusted PEG ratio of less than 1, based on 2022 earnings estimates. It also trades for a steep discount when compared to eCommerce peer Amazon.com (AMZN) which trades with a one-year forward PE ratio of 53.9.

Alibaba is delivering substantial revenue and earnings growth and based on estimates, it doesn’t appear that it is likely to change any time soon. While environmental factors remain uncertain, once they pass, there is nothing to suggest Alibaba’s strong business trends won’t pick up right where they left off.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.


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