By Matt McCallMar 31, 2018
Not many stocks can climb 70% in a year and still have upside potential, but Alibaba (BABA) is anything but average. The largest internet company in the world and e-commerce leader of China has its hands in most of the high-growth technology sectors around the globe, making it a stock you want to hold for the long term.
That’s one of the greatest benefits of owning BABA – it gives your portfolio instant diversification. Aside from its Asian e-commerce dominance, it also has ties to self-driving cars, social media, mobile payments, streaming video and artificial intelligence. Through a variety of investments over the years, many of the company’s smaller divisions have growth into multi-billion dollar businesses of their own.
Then there’s the forward P/E ratio, which at 26.5 is well above the majority of U.S. stocks as well as some of BABA’s Chinese peers. However, when you take into consideration the company’s dominance and growth potential, that number isn’t as intimidating.
One way to better understand the current P/E ratio is to compare it to historical figures. Since BABA went public to a lot of fanfare in 2014, the forward P/E has never been this low. And in order for it to drop, either the price of the stock needs to fall or the earnings expectations have to increase. In this case, the shares are 10% below their all-time high, but the bigger reason for the decline is the fact that forward bottom-line expectations have increased. In fact, the growth estimate for the current quarter is 50% above last year. That’s the best-case scenario.
Alibaba has been stuck in a fairly narrow range since last August, mostly trading between support at $170 (the lower black line) and resistance at $195 (the upper black line). There was a quick breakout to a new all-time high above $200 in January, but that was quickly interrupted by the broad market correction.
The stock has held up well amid the recent pullbacks, and based on its current valuation BABA is poised for a breakout in the coming weeks. Given the increased volatility, there is a chance that it will hit $170 again before the next attempt beings, but that’s exactly why I recommend taking a longer-term approach here. Any near-term weakness is an opportunity to buy a stock that has potential up to $250 over the next year.
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