Trump Threat Hinders Alibaba (BABA) After Strong Quarter

Alibaba Group Holding Limited (BABA) is trading lower by more than 1% at the start of Thursday's session after posting a fiscal first quarter 2020 profit of CNY14.82 per-share, or about $2.14 per share at the current exchange rate. Revenue rose 33.8% year over year to CNY153.75, highlighting the full recovery after the first quarter's pandemic shutdown. The company reported 742 million "annual active customers" at its retail marketplaces, while mobile monthly active users (MAUs) reached 842 million in June, coming in 28 million higher than in March 2020.

Key Takeaways

  • Alibaba beat profit and revenue estimates, but the stock is selling off in the regular session.
  • President Trump recently threatened to ban Alibaba and other mainstream Chinese companies.
  • The stock is currently trading within a symmetrical triangle that predicts higher prices.

Macro headwinds are intensifying the modest sell-the-news reaction after President Trump said that he would consider banning Alibaba and other mainstream Chinese companies, as follow-up to pressure being applied to TikTok and ByteDance. The market hates uncertainty, and this comment could hang a dark cloud over Alibaba stock, limiting gains in coming weeks. It also isn't clear what actions Joe Biden would take against Asian companies if he's elected in November.

Trump's threat hasn't trickled down to Wall Street just yet, with a "Strong Buy" consensus based upon 20 "Buy," 1 "Hold," and 0 "Sell" recommendations. It's likely that analysts will just ignore the statement, given the lack of consistent Chinese policy management in the past three years. Price targets currently range from a low of $216 to a Street-high $316, while the stock opened Thursday's session about $23 below the median $278 target. 

Monthly active users (MAU) is a key performance indicator (KPI) used by social networking and other companies to count the number of unique users who visit a site within the past month. Websites generally recognize monthly active users via an identification number, email address, or username.

Alibaba Long-Term Chart (2014 – 2020)

Long-term chart showing the share price performance of Alibaba Group Holding Limited (BABA)
TradingView.com

The company came public on the U.S. exchanges at $92.70 in September 2014 and fell into the low $80s one month later. The subsequent uptick hit new highs in October and added to gains into the November high at $120. The stock then relinquished 100% of those gains, dumping into the upper $70s, which marked support until an August 2015 breakdown reached $57.50. A February 2016 test at that level completed a double bottom reversal, setting the stage for a recovery wave that reached the 2014 high in May 2017.

An immediate breakout stalled just above $200 in June 2018, marking resistance until a December 2019 rally failed above $231 in January 2020. The stock fell to a five-month low in March and bounced back to the high in June, breaking out about two weeks later. That buying impulse posted an all-time high at $268 in July, giving way to a symmetrical triangle consolidation that is still in force as we head through the dog days of August.

A symmetrical triangle is a chart pattern characterized by two converging trendlines connecting a series of sequential peaks and troughs. These trendlines should be converging at a roughly equal slope.

Alibaba Short-Term Chart (2019 – 2020)

Short-term chart showing the share price performance of Alibaba Group Holding Limited (BABA)
TradingView.com

The on-balance volume (OBV) accumulation-distribution indicator has matched bullish price action in recent years, topping out in June 2018 and again in January 2020. It broke out with price in June and has lifted to an all-time high as well. Just keep in mind that this is an American version of a Chinese equity, with a huge volume of buy and sell transactions taking place in Hong Kong and other venues.

A symmetrical triangle at the top of a healthy breakout is extremely bullish in most cases, predictive of even higher prices. However, it's hard to ignore Trump's threats because they have the power to trigger a rapid overnight decline. Hopefully, that bearish development will show up in price action ahead of the news, allowing shareholders to take profits and hit the sidelines before the bottom drops out.

The Bottom Line

Alibaba is trading lower after a strong earnings report but is holding within a symmetrical triangle that predicts higher prices.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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