Undervalued Alibaba Group Holding Limited (NYSE:BABA) Stock Will Grow to $250 in 2020

Undervalued Alibaba Group Holding Limited (NYSE:BABA) Stock Will Grow to $250 in 2020

Undervalued Alibaba Group Holding Limited (NYSE:BABA) Stock Will Grow to $250 in 2020

In 2019 I pounded on the table time and time again that shares of Chinese internet giant Alibaba (NYSE:BABA) would soar above $200. In late 2019, Alibaba stock did just that. And as soon as it did, I told investors that the rally wasn’t over, and that $250 was the next stop.

A little over a month later, Alibaba has already made solid progress toward that $250 level. Gaining double-digits to around the $225 level (Editor’s Note: As of publication, Alibaba’s stock traded at $221.56).

The rally won’t stop here. Alibaba will keep pushing higher toward (and above) $250 by the middle of 2020 for two major reasons. First, the micro and macro fundamentals surrounding the company are dramatically improving, and they will continue to improve for the next few quarters. Second, Alibaba’s valuation remains discounted relative to the company’s promising long-term growth prospects.

As such, I’m sticking with this rally in BABA, and won’t consider selling until shares have jumped above $250.

Alibaba Stock Fundamentals Improve

No matter how you look at it, Alibaba’s fundamentals are dramatically improving. On the macro level, the biggest factor is deescalation in the U.S.-China trade war. Tensions between these economic powerhouses have meaningfully relaxed over the past few months, and as they have, China’s GDP growth has stabilized (6% growth in both the third and fourth quarters of 2019), the Purchasing Managers Index has rebounded (from sub-50 for several months in mid-2019, to above 50 in both November and December) and retail sales growth rates have also bounced back (from sub-8% growth for several months in mid-2019, to 8% in both November and December).

Trade war deescalation will persist for the foreseeable future because neither side wants to upset the economic balance that has materialized ahead of the 2020 U.S. presidential election. This sustained easing of trade tensions, coupled with supportive monetary policy from China’s central bank (which just dramatically expanded lending capacity throughout the country), will spark a rebound in China’s slowing economy in 2020. At the same time, it will weaken the U.S. dollar and strengthen the Chinese yuan.

That’s all positive news for Alibaba stock holders. And on the micro side, Alibaba’s margins are already materially improving as the company phases out big growth investments from 2018. This phasing out will couple with revenue growth re-acceleration in 2020 to spark even bigger margin expansion.

Concurrently, Alibaba is expanding internationally into Europe, Nintendo (OTCMKTS:NTDOY) just launched its ultra-popular Switch console in China, and Amazon’s (NASDAQ:AMZN) head cloud executive says that he sees Alibaba gaining share in China’s cloud market. New revenue from Europe, bigger revenue in China from Switch sales, and sustained revenue growth from cloud will all help Alibaba’s growth trajectory improve in 2020.

Alibaba Stock Remains Cheap

Considering how strong the Alibaba growth narrative is today and how much more this company can grow in the long run, Alibaba stock remains remarkably cheap at current levels.

The numbers are simple: Alibaba is a huge growth company. As in 40% revenue growth big. Of course, the company won’t sustain 40% revenue growth forever; growth rates will slow with scale and tougher laps. But growth drivers such as continued expansion of China’s digital economy, enterprise cloud adoption and international retail expansion should allow the company to maintain relatively big growth rates for a long time.

Analysts see Alibaba growing revenues at a 20%-plus rate for the next three years. Along those lines, I see revenues sustaining 10%-plus growth into 2025.

At the same time, Alibaba’s profit margins should run higher. Margin expansion will be supported by economies of scale, bigger revenue contribution from the higher-margin cloud segment and continued logistics cost-optimization.

Under these very reasonable growth assumptions, my long-term model on Alibaba pegs the company’s 2025 earnings potential at $20 per share. Based on a forward price-earnings multiple of 20, which is a historically average multiple for the information technology sector, that implies a 2024 price target for BABA stock of $400. Discounted back by 10% per year, that equates to a 2020 price target of $250.

Bottom Line on Alibaba

Everything is going right for Alibaba right now, and everything is projected to keep going right for the foreseeable future. Against that backdrop, the only thing that will stop Alibaba stock from going higher is valuation friction. But shares won’t run into that friction until the $250 level. For now, the BABA stock rally will stay alive.

Technical Indicators

Overall, the bias in prices is: Upwards.

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

The projected upper bound is: 231.57.

The projected lower bound is: 214.47.

The projected closing price is: 223.02.

Candlesticks

A white body occurred (because prices closed higher than they opened).
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 30 white candles and 20 black candles for a net of 10 white candles.

A falling window occurred (where the bottom of the previous shadow is above the top of the current shadow). This usually implies a continuation of a bearish trend.

A long lower shadow occurred. This is typically a bullish signal (particularly when it occurs near a low price level, at a support level, or when the security is oversold).

A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.

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 30.0691. This is not an overbought or oversold reading. The last signal was a sell 3 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 59.36. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 3 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 5. This is not a topping or bottoming area. 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 sell 0 period(s) ago.

Rex Takasugi – TD Profile

ALIBABA GRP ADR closed down -5.170 at 222.260. Volume was 4% above average (neutral) and Bollinger Bands were 2% narrower than normal.

Open     High      Low     Close     Volume___
222.110 222.520 220.745 222.260 3,579,558
Technical Outlook 
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period     50-period     200-period
Close: 223.69 204.64 180.24
Volatility: 29 26 35
Volume: 2,789,736 3,883,588 3,494,015

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 gapped down today (bearish) on normal volume. Possibility of a Runaway Gap which usually signifies a continuation of the trend. Four types of price gaps exist – Common, Breakaway, Runaway, and Exhaustion. Gaps acts as support/resistance.
ALIBABA GRP ADR is currently 23.3% above its 200-period moving average and is in an upward trend. Volatility is extremely high when compared to the average volatility over the last 10 periods. There is a good possibility that volatility will decrease and prices will stabilize in the near term. 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 56 periods. our momentum oscillator has set a new 14-period low while the security price has not. This is a bearish divergence.

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