Alibaba (BABA): Dissecting the FUD, Fundamentals, and Technicals

19 nov 2020

Alibaba Group is a Chinese multinational tech company specializing in e-commerce, and IT. This Chinese company is listed on the New York Stock Exchange (NYSE) as BABA. In this analysis, I’ll be covering the company’s fundamentals by looking at its business model and financials, as well as technical analysis for the stock. I’ll also be providing my own insight on why this stock has been rather underperforming for the past few weeks, and what we can expect for the future.

Business Model
- Alibaba, while it initially started with a focus on e-commerce, has expanded to other territories as well
- It aims to offer the necessary digital infrastructure as an e-commerce platform, providing small businesses the necessary tools and equipment to operate online.
- Alibaba also takes part in cloud computing, just like AWS and Azure, offering data storage, big data analysis, and machine learning services.
- Alibaba also has a business dedicated to digital media, producing original content
- Alibaba owns 33% of Ant Financial’s shares, which is what affected the price action so heavily recently

Ant Financial IPO FUD
- Ant Financial is a company that was formerly known as Alipay.
- Its expected market valuation after the dual listing was expected to reach over $310 billion, which would have significantly affected BABA’s price as well.
- However, the Chinese Communist Party halted the Initial Public Offering (IPO) of this company, without an official explanation.
- Ant Financial has transformed the way Chinese people interact with money. It challenged China’s banking system by brining easy use of payments, borrowing, and investing through smartphones across the entire country
- Ant Financial’s business model, in essence, puts financial services outside the direct control of the CCP and Chinese banks

Financials
- So at this point, we understand why Alibaba’s stock prices have been negatively affected by news.
- Looking at the company’s financials, we can discover that the firm’s fundamentals remain solid
- The company has shown a parabolic growth in their revenue since 2010, reaching record highs for the 2020 Estimate
- Accordingly, its operating income grows at a steady pace as well.
- Its gross profit margin averages at 55.5%, which is considered as extremely high profit margins
- They did report a decline in yoy EPS for the 12 months ending in September 30, 2020, and a 60% yoy decline in the EPS for the quarter ending at the same time.
- Nevertheless, it has still managed to beat the consensus EPS, and continues to demonstrate yoy growth

Technical Analysis
- This is the weekly chart for Alibaba
- We can see that it was consolidating in a rising wedge pattern, before breaking out in July 2020.
- Due to the Ant Financial IPO cancellation FUD (fear, uncertainty, and doubt), stock prices fell from $320 down to $255.
- Elliott Wave counts suggests a further potential downside to $220-230 levels, where it could complete the corrective wave at the gap support
- We can also see that prices have never broke down the 150 Simple Moving Average (SMA) on the weekly.
- This indicates that the converging point of the 150 SMA and the 0.618 Fibonacci retracement support at $200 could be considered our last line of support
- Thanks to the recent corrective move, however, the Relative Strength Index (RSI) has been flushed out to neutral levels, from overbought territories
- It seems as though the RSI could bounce on the trend line support soon

Conclusion
Alibaba is a solid company with strong fundamentals and financials, as well as a business model that expands throughout a wide range of areas. It has fallen victim to the restrictions imposed by the Chinese Communist Party recently, but it’s important to understand the role this company plays for the Chinese economy and the world economy. Companies like Alibaba are essentially too big to fall. There are attempts made by governments of various countries such as the US with big tech companies, and South Korea with Samsung Group, to regulate dominant firms. Regardless, none of them have actually succeeded besides a small correction in stock prices driven by FUD. As such, while technical analysis suggests further potential downside, I believe that investors should approach this stock from a buy perspective.

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