Why do we think that Alibaba has great long-term growth prospects?

Alibaba Group Holding is the largest and most successful e-commerce giants in China. Alibaba is often referred to as the Amazon of China due to the fact that over the last few years, the company has evolved from being a traditional e-commerce company to a conglomerate that has businesses ranging from logistics and food delivery to cloud computing.

Alibaba Group’s operations spread across three different business models, which significantly helps the company to dominate the entire Chinese ecommerce world – Alibaba.com, Taobao, and Tmall. This is one of the things that makes Alibaba unique as it covers the entire ecommerce spectrum ranging from consumer-to-consumer (C2C), business-to-consumer (B2C), and business-to-business (B2B) sales services via its web portals, as well as electronic payment services, shopping search engines and cloud computing services. Alibaba.com is the flagman of the company’s operations and it focuses exclusively on providing a direct B2B service. Taobao Marketplace facilitates consumer-to-consumer (C2C) retail by providing a platform for small businesses and individual entrepreneurs to open online stores that mainly cater to consumers in Chinese-speaking regions (Mainland China, Hong Kong, Macau and Taiwan) and abroad, which is made payable by online cellphone accounts. Its stores usually offer an express delivery-service to their clientele. Tmall on the other hand is a platform for local Chinese and international businesses to sell brand name goods to consumers in mainland China, Hong Kong, Macau and Taiwan. This puts Tmall in the B2C online retail category, which also closes the whole ecommerce circle for the company. It is important to note that businesses account for more than half of all online retail sales in China, which is one of the world’s fastest-growing e-commerce markets. Taobao is one of Alibaba Group’s most profitable marketplaces that generates for more than 80% of its sales, thanks to soaring demand for high-quality imported brands in China.

Financial performance, Q1 2020 results, coronavirus impact & expectations for the future

Alibaba’s stock has held up relatively well so far in 2020, gaining around 5% YTD and it currently presents an attractive combination of a strong fundamental positioning with a generally positive technical picture. One might say that this is nothing especially impressive, and one would be correct to do so if we were sitting in a rather normal market environment. However, this year has proven to be everything else but normal so far, as we saw tremendous volatility expansions both to the downside and to the upside in recent months. Some of the hardest hit sectors saw leading companies with tremendous track records, business models and general historical success like Boeing, General Electric, Walt Disney, Starbucks, Ford, Delta Airlines etc. lose anywhere between 50-70% of their market capitalization. In the meantime Alibaba, has shown a certain level of resilience and stability which definitely attracts a lot of investors attention. While the company is not immune to Covid-19, it had an impressive fiscal fourth quarter. Alibaba reported $1.30 in adjusted earnings per share, up 2% from a year ago. Revenue was up 22% from a year ago and 7% ahead of consensus analyst estimates. Alibaba’s cloud revenue was up 58%.

We should also always remember that the scale on which Alibaba operates is impressive as it has 960 million active customers. Just to put that number in perspective, that’s roughly three times the entire population of the U.S. While Alibaba is often compared to Amazon (AMZN) because of the relatively close business models that the two companies share, we must acknowledge the fact that their growth numbers certainly aren’t similar. Amazon’s trailing 12-month revenue growth is 209% in the past five years. Alibaba has more than double that growth rate at 460%. Yet AMZN stock is up 521% in that stretch compared to just a 155% gain for BABA stock. Let that sink in.

One of the major risks for the stock last year was associated with the trade tensions between US and China as a lot of investors were worried that if any major trade restrictions are imposed on China then this might seriously hurt Alibaba’s business. However, tensions were relieved at the end of 2019, with the signing of the phase one trade deal between the Washington and Beijing. It was no surprise that Alibaba’s all-time highs in January, 2020 coincided almost perfectly with that event.

The business world is a constant roller-coaster and in many instances right when you think that you are out of the woods and its all sunshine and rainbows ahead, something drastically changes and you find yourself in another difficult predicament. This definitely sounds familiar to Alibaba’s shareholders as right when it seemed that the trade tensions that persisted for almost a year were resolved, the coronavirus hit the global economy and then the US government and more specifically President Trump began an all out accusation campaign against China, blaming them for intentionally spreading COVID-19 around the world. The debate on this issue got very heated and it led to the Senate passing the Holding Foreign Companies Accountable Act (HFCAA). The bill would require Alibaba and all other U.S.-listed Chinese stocks to verify they are not controlled by the Chinese government. Alibaba would also have to submit its financials to Public Company Accounting Oversight Board’s (PCAOB) audits for three consecutive years. As a result, there has been an active discussion in the media regarding a potential forceful delisting of all Chinese stocks from the US equity market. This put a lot of selling pressure on the stock few weeks ago as we saw it dropping with almost 12% in a matter of 5-7 trading days.

However, we would like to point out few very important facts as to why we believe that the likelihood of Alibaba and some of its Chinese counterparts being delisted from the US exchanges is practically very low. First of all, losing Alibaba and other Chinese stocks would cost Wall Street stock exchanges, brokers and investment banks millions of dollars. They would lose trading fees, underwriting fees and other income.

“Wall Street will be lobbying to try to block it, because it makes a lot of money off of listings of Chinese companies in the United States,” Harvard Law School professor Jesse Fried said.

Fried said the House may not even bring the bill up for a vote. Voting against it would make representatives look weak on China. But voting for it would anger their deep-pocketed Wall Street donors. I think people may be underestimating how much of an impact the investment community has on U.S. politics. When it becomes clear to investors that BABA stock isn’t going anywhere, it could trigger a relief rally.

The effect of the upcoming US Presidential Elections

Surveys show that investors generally view Republican policies as better and more constructive for the stock market than those of the Democrats. However, statistics show that stocks have historically performed better under Democratic presidents than Republican ones. Natixis Investment Managers recently found that since 1976, U.S. stocks have gained an average of 14.3% a year when a Democrat is in the White House versus only 10.8% when a Republican is in the Oval Office.

These percentages and correlations lose all meaning when Donald Trump is the Republican and Alibaba is the stock, as that’s a unique situation.

If we have to be brutally honest the trade war isn’t really a Democrat or Republican issue. It’s a Trump issue. The former vice-president Joe Biden is viewed as a much more balanced and well-spoken presidential candidate than Donald Trump and if he is elected, trade war rhetoric will surely die down. The relationship with China will hopefully improve, eliminating uncertainty and risk for Chinese companies. The PredictIt market currently suggests a 60% chance Democrats will win the White House in November. In a year full of bullish catalysts for BABA stock, a Biden victory could be the biggest one of all.

Positive Catalysts

Alibaba serves about 80% of the Chinese e-Commerce market where population density is very high. E-Commerce Index reveals which developing markets hold the most potential for online growth, and China is now leading the race in terms of maximizing the potential of the Internet compared with the West. The low-cost, widely available telecommunication infrastructure in China has increased the popularity of online shopping. Additionally, these developing economies are undergoing a major urbanization process at the moment and are seeing a substantial improvement of the standard of living for people who are moving from the rural areas of the country to the highly densed and economically prosperous cities. The rising standard of living is directly correlated with higher levels of disposable income, which in turn is directly translated into higher online and offline retail turnover volumes as people are trying to improve their lifestyles drastically. Alibaba’s Tmall platform is well positioned to capture the rising demand for high-quality products and services. It accepts only verified stores and sells only genuine products, helping build consumers’ trust and in turn increase conversion rates. Alibaba aims to achieve US$1 trillion in Gross Merchandise Value by fiscal year 2020.

The company is well positioned in the New Retail space. In this space, it aims to bring together digital payments, e-commerce, food delivery and other parts of the business into one big ecosystem. The ubiquity of smartphones and evolution of physical and online commerce are helping the company to gain momentum in this space.

Launched in 2009, the cloud business is now one of the biggest in China. The cloud computing has gradually become one of the fastest-growing businesses and the second-largest revenue source for Alibaba. The company has also become a renowned name in the growing entertainment and media market, driven by increasing demand for videos across its platform and growing partnerships.

Alibaba continues to witness increasing monetization rates or in other words the company continues to earn more from the sale of goods on its platforms. The fact that more and more high-quality merchants have joined its platforms creates a larger variety of available products and higher inventory volumes, which in turn translates into higher monetization rates.

The company is also working on the development of what it calls “New Retail” to bridge the gap between online and offline shopping using its big data capacity. It expects that the system will offer brick-and-mortar retailers new ways to evolve across marketing, inventory and distribution networks. These look promising and will not only reshape the retail landscape but also help Alibaba fend off competition.

Technical Analysis

By looking at the chart and the historical price movements, we should mention that based on the company’s strong financial performance over the past fewyears Alibaba’s stock has more than tripled since its IPO in 2014. The stock became available to the general public on September 18th 2014 with a $68 price tag and we saw the stock hitting its all-time high at $231.14 in the beginning of 2020, just before the coronavirus outbreak hit the market and before all of the negative consequences that it brought with itself. The above-mentioned all-time highs were reached after the stock broke above the strong $188 resistance zone in late November, 2019 which was by the way mainly driven by the outstanding volumes that the company generated on the Singles Day in China, $38.4 billion in sales, up 26% from 2018. Now, the $180-190 zone is viewed as a critical support area for the stock as there are many key dynamic and static supports that overlap in this region. For example, the 50-week moving average and 100-week moving average are both currently sitting at the $190 and $180 levels respectively. Furthermore, the lower Bollinger band on the weekly chart is also lying at the $183 mark, which will provide further support in the event the stock experiences a strong selling pressure. Additionally, the daily chart also shows that the stock is currently being rejected at around its all-time highs on a lower than average volume, with progressively weakening momentum. The price is currently forming lower highs relative to the Bollinger Bands and the RSI, which is an indication that another decline might be ahead for the stock. This is the reason why if you are a long-term bull on Alibaba’s stock it is important to know which levels should be treated as strong supports that could stop any potential declines. In this way you could not only protect your portfolio in an efficient manner, but you could also open new BUY positions at a substantial discount.

In fact, intelligent investing is the process of buying undervalued stocks with a great financial performance at a huge discount, which then gives an opportunity for investors to make a lot higher profits to the upside when the stock starts recovering. Well, taking into account the strong financials, the impressive performance the company has had over the years and the positive growth expectations for the future we believe that Alibaba’s stock is a must-own stock by the modern-day investor. We also believe that the expected short-term correction that we project for the stock in the coming weeks, due to the generally overbought conditions for the broader market will present a tremendous buying opportunity for our followers to open their Long BABA positions at a substantial discount from the current all-time high levels.

As you know, our approach to the market is based on our Dow Theory 2.0, which gives us a chance to get a confirmation of whether a particular investment is worth going for only if we get a confirmation from some of the biggest ETFs out there that have got the stock within their portfolio.

Vanguard FTSE Emerging Markets ETF

In order to get a confirmation whether BABA is a good investment opportunity around the current levels, we will firstly look at one of the biggest ETFs out there that invests in the stock – VWO (Vanguard FTSE Emerging Markets ETF), where with 18.12M shares Alibaba accounts for 6.84% of the fund and plays an important role for the ETFs’ overall performance.

VWO tracks a market-cap-weighted index of emerging-market stocks, excluding South Korea

VWO is one of the earlier ETFs to launch in this space. In 2013 it switched to a FTSE index which does not count South Korea as an emerging market, putting it in direct competition with Schwab’s SCHE rather than iShares’ EEM. In November 2015 the fund initiated another change, this time to include both small-cap stocks and China A-shares. It eased into this change with a dynamic transitional index, completing the transition in September 2016. Since VWO has no exposure to South Korea, it has more space for China, Brazil, India and the rest of the emerging nations compared with our MSCI benchmark. Including stocks from the Chinese mainland and going deeper into the market-cap spectrum made the fund even more representative of the EM space, but also reduced underlying liquidity somewhat. Still, VWO is a solid choice for comprehensive exposure to emerging markets without South Korea.

The daily chart clearly shows the huge depreciation of the VWO between the middle of February and the 23rd of March this year where the leading ETF’s price dropped from the $45 highs to the lows at $30 (33%), following the global stock market sell-off all across the globe. Yet, investors saw this as a great opportunity to buying the VWO around the $30 lows, which gave them a chance to have a well-balanced and diversified exposure to the global emerging markets. Investors interested in adding some international exposure to their portfolios were attracted to this ETF in particular as a result of the fact that the funds invests heavily into some of the most attractive international growth stocks out there like Alibaba, Tencent, Taiwan Semiconductor Manufacturing etc. Investors that expect a general stock-market recovery in the coming months recognized that this was an outstanding opportunity to increase their 2020 investment returns. Thus, the VWO started to progressively recover its losses and we saw the price gaining around 30% in the period April-June.

In other words, the positive investment sentiment was definitely present in the market over the past 2 months, but our analysis shows that the bullish rally has somewhat extended itself already and as a result of that we are seeing some short term exhaustion patterns across almost all of the indices and ETFs that we are monitoring. The price for VWO found a very strong rejection by the downward sloping diagonal resistance around the $40 mark. There is another strong horizontal resistance lying around this general vicinity, which is also making the upside scenario kind of grim. The price is now at the end of a triangular formation, which could be easily seen on the daily chart, and the next break will determine the near-term price movement. With that being said we see that a much stronger case could be made for a downward break of the triangle. This would in turn open the door for a test of the $37 and $34 support levels.

The RSI, Stochastics and Bollinger band indicators have also been giving lots of indications that the VWO is experiencing a shift in short-term investors sentiment and the recent rallies have continued to be much weaker on a relative basis than the ones we saw a month ago. The price failed to break the $40 resistance level and that has motivated investors to start cashing in some of the profits they have made to the upside. Therefore, we expect that a combination of a profit-taking interest in the short-term with a broad-based market correction, will create a good buying opportunity for long-term investors to buy the ETF at a great discount.

Yet, we believe the VWO remains strongly bullish in the long-term and it is expected to find further buying activity as it tests the key support mark at $34, which used to be a resistance that was broken during the huge buying activity that has taken place lately. The fund invests in high-growth proven and well-established businesses, thus these stocks will definitely be among the big winners in the long term.

In order to be even more comfortable with our short-term bearish expectations for Alibaba’s stock we would also be analyzing the performance of the SPY (SPDR S&P 500 ETF Trust) due to the fact that the correlation between the VWO and the SPY is 75% and it is one of the strongest correlations between the S&P 500 and the Emerging Markets out there.

SPY (SPDR S&P 500 ETF Trust)

By looking at the daily chart, one could easily see that the SPY has managed to bottom out around the $220 lows back in the end of March after the huge sell-off that took place as a result of the coronavirus related global economic shutdown. The price of the ETF collapsed from the $340 highs in a matter of couple weeks.

Yet, the SPY found its ground at the $220 lows and that led to a very strong bullish reversal of the price that sent the SPY on a 45%+ rally to the upside. On the way up the ETF has managed to break few key resistance levels in the past 2.5 months, such as the $263, $280 and $300 to reach the current levels at $308. It is important to say that the whole stock market in the US has been extremely bullish over the past few months after the massive sell-off during the coronavirus outbreak. The market has managed to recover most of its losses, giving indications for further potential bullish rallies in the future. However, certain concerns about the strength of the recent rally have started to find more and more support among both institutional and retail investors. The fact that long-term value investors like Warren Buffet are so far Net Sellers of equities in 2020, indicates that there is something wrong with this broad-based positivism in the stock market in a time where we have over 40 million Americans unemployed, a negative GDP and the highest unemployment rate since the Great Depression in 1929. Thus, we advise our followers to be rather cautious in the coming weeks, and to try to possibly collect some profits from the market if they still have any long exposure to equities.

The SPY’s chart looks very similar to those of VWO and BABA. In fact, after the strong bullish readings across the major technical indicators that we have been following in the last few months, they have started to show some worrying signs recently. Rallies have seen a continuous decline in volumes, while price declines have started to see a substantial pick up in the general traded volumes, which in turn shows that a general short-term sentiment shift is in play at the moment. Moreover, on the daily chart we can clearly see that the first horizontal support (broken resistance) at $300 matches with the diagonal support at that level that has been forming since the price started moving higher from the $220 lows on the 20th of March. The technical indicators are signaling for a potential profit-taking interest as they have gone closer to the overbought territory after the huge bullish trend in the past 2.5 months. In other words, we might see a bit of a profit-taking correction to the downside, which would send the price closer to one of the 3 strong support levels – $300, followed by the next one at $295 and the major support level at $280. In fact, we are expecting to see lots of further buying interest once the price reaches those support levels and we believe it will give a great buying opportunity for investors to buy the SPY at a great support after a short-term pullback from its highs, giving them an opportunity to further boost their profitability to the upside.

Therefore, our long-term expectations remain strongly bullish, with a raised short-term bearish cautiousness for a potential decline in the coming weeks. Based on the recent performance of the SPY, we believe it clearly confirms both our short-term bearish stance and long-term bullish position on Alibaba’s stock.

Conclusion

Based on the above-stated facts and after analyzing the performance of the VWO and the SPY, we should say we remain very bullish on Alibaba’s stock in the long-term, but cautiously bearish in the short-term. We expect the leading ecommerce company to find continued growth in the increased consumer spending in China and we believe that Alibaba will not only keep its dominant position as an ecommerce giant but it will also continue to work hard on its international expansion efforts and on the development of one coherent and functional ecosystem. The unstable economic and stock market conditions in the last few months will definitely have a negative impact for the company, but we see this more as a short-term speed bump rather than a major long-term business threat. The Dow Experts believe all those corrections to the downside could be a great buying opportunity where we can start investing in the world’s leading stocks at a huge discount – an opportunity we hadn’t had for 11-12 years since the financial crisis of 2008. In other words, we would like to use the upcoming short-term correction to our advantage and buy Alibaba’s stock at some of the strong support levels mentioned above.

As we have already mentioned above, the technical indicators on all 3 charts we have analyzed today – BABA, VWO and SPY are showing us the same general weakness and exhaustion after the huge bullish rally over the past 2.5 months since the 20th of March. Therefore, we will wait for a short-term correction of around 8-12% on BABA, which would send the price towards the first support level at $200 where we will start buying the stock aggressively. Should the price make a further correction to the downside, we will be waiting patiently until it reaches the next key support level at $188, which is a level that the stock has respected many times in the past. In case the price reaches the key support at $180 we will be interested in buying more and improving our average cost basis on the stock. In fact, we are expecting to see more buying pressure at those 2 levels and the price is likely to continue its strong bullish appreciation for the next few weeks and months. Our first profit-taking target is set at $235, followed by the longer-term target at $250 where we will be fully cashing in our profits and wait for another profit-taking correction in order to buy the stock again at a discount, which in turn would give us a chance to maximize our followers’ profitability to the upside.



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Sincerely,

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