Alibaba (NYSE:BABA) has been an increasingly tricky stock to deal with this year. On one hand, we have a thousand and one reasons to buy into the stock (not as much FOMO, Charlie Munger etc.) but on the other hand, the market sentiment just doesn’t seem to be bullish.
Unfortunately, their Q3 earnings report last night greatly disappointed investors and I’ld say that at present, the bear rally is likely to continue given how all factors seem to be working against the company at present.
In this article, I’ll be doing a deep dive into the technical analysis of Alibaba at this crucial support level of $140-$142 and provide some commentary on the fundamentals of their earnings as well as their price action.
Lowered expectations, missed revenue, economic slowdown
The following key figures summarise BABA’s Q3 results,
- Revenue: 200.69 billion yuan ($31.4 billion) vs. 204.93 billion yuan estimated, a 29% year-on-year rise.
- Profit: 5.37 billion yuan (July – September 2021), a 80% decline from the same period last year.
- EPS: 11.20 yuan vs. 12.36 yuan estimated, a 38% year-on-year decline.
- Net Income: fell 87 per cent to 3.4n yuan, missing forecasts.
The 87% drop in quarterly net income was attributed to increased investments in what Alibaba calls “key strategic areas,” in addition to Beijing’s continued crackdown on the tech sector.
Daniel Zhang, chairman and CEO of Alibaba Group,
Key Commentary,
- Alibaba cited high investment and losses from equity investments as the cause of the drop.
- It cited no direct impact on its profit from the clampdown, instead blaming the decline on “increased investments in key strategic areas” such as lower-tier segments of its consumer markets and international operations.
- Crackdown on domestic tech include new regulations from antitrust to dataprotection.
- Seed investment in businesses, such as bargain app Taobao Deals, Local Consumer Services, Community Marketplaces and Singapore-headquartered e-commerce platform Lazada, rose by RMB12.6 billion year-over-year. Excluding these investments, profits from commerce would have been stable year-over-year.
“This quarter, Alibaba continued to firmly invest into our three strategic pillars of domestic consumption, globalization, and cloud computing to establish solid foundations for our long-term goal of sustainable growth in the future.”
CEO Daniel Zhang – Response to Q3 Results.
The facts and figures above aren’t exactly optimistic in any way but the nail in the coffin was really how the company is lowering its targets for AY2021
The company also slashed its revenue guidance for its current fiscal year. It previously expected to bring in 930 billion yuan, which would have been about 29.5% year-on-year growth. But it now expects growth to be between 20% and 23% year-on-year.
Author’s thoughts
The situation is indeed grim for Alibaba. When we look at the tightening of regulations by the Chinese government, we are looking at more than just a hefty fine. We are looking at the government trying to “adjust” certain aspects of consumer behavior where the concept of “common prosperity” can guide the narrowing of the wealth gap in China.
To this end, my personal thoughts are that this may indeed negatively influence e-commerce as there is an unspoken rule where people should not spend excessively when unnecessary.
In the event that my thoughts are correct, this would mean that we may be at an inflection point for e-commerce where sales from here may start to stagnate or even decline.
With singles’ day GMV as an indicator, we can see from this diagram below that we may have reached peak sales given how Covid was a major catalyst for e-commerce last year and how sales for this year grew at just “8.5%, the slowest pace ever.”
Q3 Results Technical Analysis
Prior to the release of the results, analysts discussed that there may be a possible bullish reversal forming in BABA’s price action. This is seen in the diagram below through a reverse head-and-shoulder formation which is considered by many the possible end of a bear rally. With the bottom forming at $140 and the neckline at $160. $160 was widely considered a strong short-term support for the stock.
With the Q3 results, we now see the price action of BABA testing its previous low of $140 as it did in early October. Should prices rebound from here, it will be the much-needed double-bottom that the bulls need for BABA as it is also regarded as a bullish reversal sign.
Apart from the price action, the Relative Strength Index (RSI) is looking neutral at the moment with the RSI for the stock at approx. 30. I interpret this as a positive sign as it may be an indication that investors are “comfortable” to enter at such prices.
Moving forward from here, I expect to see some consolidation at these $140 levels as I think it is unlikely that BABA will be making any lows from here. At the same time, I wouldn’t be to optimistic that we will see price breaking above the neckline of $160 as well.
I’m still buying Baba – why?
For me, I’ve been buying Alibaba at every major low initially at $200 and again at $150 as I consider these price points the physiological support levels for the stock. With reference to the reverse head-and-shoulders diagram above, I was also caught on the wrong end of it as I bought more shares at about $160 only to see it fall to $140 upon earnings release. With yesterday’s action, I bought more as it was indeed a little tempting.
Am I right or am I wrong?
No one knows but what I can say is that I’m more comfortable entering at around $150 rather than at the $300 levels when this stock was trading at this time last year.
So you are still buying around $150 mostly based on your technical analysis views? As your fundamental analysis of the company seems to point towards a bleak scenario. Just wondering what would be your thoughts of any qualitative reasons to buy now , if any. Cheers
Hi Elmer, thank you for checking in. In my opinion, from a TA perspective, the charts don’t look good as we are now testing the $140 area. Unfortunately for me, I did accumulate some at $150 as I did not expect such a dramatic reaction from the recent earning.
From a FA point of view, my theory is that growth will start to slow down however BABA is still a profitable company with a proven business model hence I am comfortable to hold on to the shares.
unlikely we will see any catalyst for now with regard to any qualitative factors. Over the weekend just had more bad news about China slapping them fines for doings in the past.