(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Alibaba Group's (BABA) stock has risen by more than 130% over the past three years, easily topping the S&P 500's rise by nearly three times. It appeared that little could stand in the way of Alibaba's stock, driven by soaring revenue and earnings. But now, shares of the Chinese e-commerce company have found themselves right in the middle of the U.S.-China trade war, falling by more than 14% from their mid-June highs. Even worse, the stock is now facing an even further decline, by as much as 9% from its current price of $180.60, based on technical analysis.
One of the most significant headwinds facing the company is the falling value of the Chinese currency, the yuan. Since June 14, the value of the dollar to the yuan has jumped by nearly 7%, with $1 equaling 6.83 yuan.
Alibaba's stock has dropped since June 14 after a failed breakout attempt at technical resistance around $201.50. Now the stock has fallen beneath a critical technical uptrend. The uptrend has been in place since early April, and the situation suggests shares will fall to the next level of technical support to $164.35, a drop of about 9% from its current price.
It isn't only the technical patterns that look weak, because the relative strength index has been trending lower since peaking in early June at overbought levels above 70. Additionally, volume levels have been increasing for the stock in recent days as it has declined. It may indicate that the current downdraft is drawing out more sellers.
Trade War Worries
One reason why the weaken yuan may be creating worries for Alibaba's stock is that the company reports results in yuan and then converts them into U.S. dollars for reporting purposes. On March 31—Alibaba's previous reporting period—the dollar was at 6.27 to the yuan, today it is nearly 9% weaker at 6.83 to the yuan. The value of the dollar to the yuan has an inverse relationship; a rising value indicates weakening. In fact, if Alibaba had reported its full-year fiscal 2018 results at the current dollar-to-yuan exchange rate, revenue would have been nearly 8% less.
As a result of the weakening currency, analysts have been reducing their revenue outlook for the first fiscal quarter of 2019. Over the past 30 days, earnings and revenue estimates have declined by nearly 5%. Full-year 2019 earnings estimates have also started coming down, dropping by almost 2.5%, while revenue estimates have fallen by almost 3%.
Analysts Price Targets Remain High
However, despite all the negative trade worries, analysts have been unfazed when it comes to their price targets. Since April 27, analysts have upped their price targets on the stock by nearly 7% to an average of $238.35, more than 31% higher than the share's current price.
It would appear that the rising trade tensions between the U.S. and China are having a negative impact on Alibaba’s stock. However, all the recent worries may quickly change to euphoria if the company can positively surprise investors when it reports quarterly results on Aug. 23.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. 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. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.