(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Alibaba Group Holding Ltd. (BABA) has seen its stock rise by nearly 97% in 2017, beating the S&P 500's return of about 20%. But more recently shares of the China-based online retailer have underperformed the market, with shares falling by nearly 10% since November 24. This could present an exciting opportunity to investors using both technical and fundamental analysis. 

Alibaba trades at just 21 times fiscal 2020 earnings estimates of $8.41, according to Ycharts, while the stock currently rests at a critical technical support level around $170. It could be signaling that shares of Alibaba are set to rise, perhaps by 22% or more in 2018, given the stocks expected earnings growth rates of about 28% in fiscal 2020. (For more, see also: Is It Too Late to Buy Alibaba Stock?)

Technicals Suggest a Bottom

From a technical standpoint, shares are showing signs of bottoming. Since mid-August the relative strength index (RSI) had been trending lower, while the stock's price had been rising, a divergence, which was suggesting the stock price had gotten ahead of itself. However, that RSI reading appears to now be turning higher, a positive indication. Additionally, during the recent downdraft, volume had increased to higher than normal levels but has been steadily declining, while the stock has found a technical support level around $170, again signaling the stock may have put in a bottom. 

 

 

 

Strong Fundamentals

There is no doubt that Alibaba is growing with earnings which are expected to rise by about 51% in 2018, nearly 30% in 2019, and about 28% in 2020. But yet, the market only values shares of Alibaba at about 21 times 2020 earnings estimates, giving the stock a growth adjusted PEG ratio of approximately 0.77. According to the Dow Jones S&P Indices, the information technology sector trades at 18.7 times 2018 operating earnings estimates, and a PEG ratio of 1.36, based on a 5-year expected growth rate of about 14%. 

About $210

Before its monster run in 2017, the last time Alibaba peaked was in November 2014, after the stock first came public in the U.S., the company traded at nearly 30 times 2-year forward earnings. Giving a discount to that multiple, at 25 times 2020 earnings estimates, the stock price comes to a price per shares of about $210, which would give the stock a PEG ratio of just 0.93—still cheap when adjusted for growth, but just about equal to the earnings growth rate. It shows how much room shares of Alibaba could have to run should the company continue to drive earnings growth. It seems unlikely that shares of Alibaba would trade a multiple above its historical high, given the company is based out of China and the potential risk that could carry. (For more, see also: Alibaba May See Unprecedented Growth: Wells Fargo.)

BABA Chart

BABA data by YCharts

With a strong fundamental setup driven by meaningful earnings growth over the next couple of years, and a technical setup indicating a potential bottom, Alibaba may be set to have another solid 2018 after a stellar 2017. 

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 holdingsInformation 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.

 

 

 

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