Alibaba Group Holding Limited (NYSE:BABA) management has announced their intention of focusing on cloud to drive future growth

Alibaba Group Holding Limited (NYSE:BABA) management has announced their intention of focusing on cloud to drive future growth

Alibaba Group Holding Limited (NYSE:BABA) management has announced their intention of focusing on cloud to drive future growth

Alibaba (NYSE: BABA) has shown good growth numbers in the past few quarters from its cloud segment. In the recent quarter, Alibaba reported $962 million of revenue in cloud computing with year-on-year growth of 84%. This has had a positive impact on the sentiment around Alibaba stock. Cloud segment is a high growth business with a potential for good margins as shown by Amazon’s (NASDAQ:AMZN) AWS.

Hence, Alibaba’s management has announced their intention of focusing on cloud to drive future growth. CEO Daniel Zhang has also mentioned that cloud would be the main business of the company in the future.

But due to the trade tensions and the negative impact of Huawei fiasco, we could see additional scrutiny on Alibaba’s cloud expansion in several international regions. Financial Review has recently mentioned the security challenges faced by Alibaba in its cloud push in Australia. Similar issues will arise in Europe, Canada, India, and other regions.

The Cloud Computing segment of Alibaba is the fastest growing segment for the company. In the recent quarter, the revenue from this segment was RMB 6,611 million or $962 million, up from RMB 3,599 million in the year-ago quarter. Hence, the revenue share of cloud computing increased from 4% to 6%.

Alibaba is trying to add new clients by aggressively pricing its cloud services. We can see this from the huge difference in the margins of Amazon’s AWS and Alibaba cloud. In the recent quarter, AWS posted an operating margin of 29.3% while Alibaba cloud showed EBITA margin of negative 4%. The company can continue to lower its prices in the near term to provide heavy discounts to clients compared to AWS.

Alibaba has also formed a strong partnership with Europe’s biggest department store, El Cortes Ingles. Alibaba would be providing payments supports, logistics, ecommerce and New Retail options to the Spanish company.

But the most important part of this partnership for Alibaba is the ability to add another big client for its cloud program. Having bigger brands on its client list should make it easier for Alibaba to add new clients in the future.

Alibaba is also a big cloud player in China where Amazon and Microsoft are very small. If a foreign brand wants to have a presence in China, Alibaba cloud would be the first choice. This gives the company a starting point to explore additional cloud service for these brands in their home country.

Alibaba cloud could face security concerns similar to Huawei as it expands in international regions. The current U.S. administration has put pressure on allies to ensure that sensitive national infrastructure does not use Chinese technology. This will limit the usage of Alibaba cloud in many areas.

It also negatively impacts the brand image of Alibaba cloud. Corporate clients who are risk averse would rather pay a premium to get AWS or other cloud providers instead of using Alibaba cloud.

A long term trend towards poor reception of Alibaba cloud will limit the revenue growth of this segment in international regions. It will also force Alibaba in giving bigger discounts to lure clients which should reduce the margin expansion within cloud segment.

The cloud segment plays a vital role in the bullish thesis for Alibaba stock. Hence, it would be important to see how the management deals with any additional security concerns regarding its cloud business.

Overall, the bias in prices is: Upwards.

Note: this chart shows extraordinary price action to the upside.

By the way, prices are vulnerable to a correction towards 160.44.

The projected upper bound is: 194.45.

The projected lower bound is: 173.91.

The projected closing price is: 184.18.

Candlesticks

A big white candle occurred. This is generally considered bullish, as prices closed significantly higher than they opened. If the candle appears when prices are “low,” it may be the first sign of a bottom. If it occurs when prices are rebounding off of a support area (e.g., a moving average, trendline, or retracement level), the long white candle adds credibility to the support. Similarly, if the candle appears during a breakout above a resistance area, the long white candle adds credibility to the breakout.
During the past 10 bars, there have been 6 white candles and 4 black candles for a net of 2 white candles. During the past 50 bars, there have been 28 white candles and 22 black candles for a net of 6 white candles.

Three white candles occurred in the last three days. Although these candles were not big enough to create three white soldiers, the steady upward pattern is bullish.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 96.8634. This is an overbought reading. However, a signal is not generated until the Oscillator crosses below 80 The last signal was a sell 12 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 76.21. This is where it usually tops. The RSI usually forms tops and bottoms before the underlying security. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 12 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 194.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a sell 3 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 1 period(s) ago.

Rex Takasugi – TD Profile

ALIBABA GRP ADR closed up 0.290 at 183.540. Volume was 27% below average (neutral) and Bollinger Bands were 14% narrower than normal.

Open High Low Close Volume___
179.800 184.350 179.370 183.540 2,961,329

Technical Outlook
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish

Moving Averages: 10-period 50-period 200-period
Close: 172.89 155.46 168.81
Volatility: 28 44 43
Volume: 2,843,741 3,458,816 4,207,119

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

ALIBABA GRP ADR is currently 8.7% above its 200-period moving average and is in an upward trend. Volatility is relatively normal as compared to the average volatility over the last 10 periods. Our volume indicators reflect moderate flows of volume into BABA.N (mildly bullish). Our trend forecasting oscillators are currently bullish on BABA.N and have had this outlook for the last 29 periods. Our momentum oscillator is currently indicating that BABA.N is currently in an overbought condition.

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