(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Alibaba Group Holding Ltd.’s (BABA) stock has plunged by 37% from its 2018 highs, and now options traders are betting the stock falls even further by as much as 7% in the coming weeks, from its current price of around $133.25. The shares of the China-based e-commerce company are due to report fiscal second-quarter results on Friday, November 2, before the start of trading.
The technical chart also supports this bearish outlook as the stock approaches a critical level of technical support. The bearish views on the stock come ahead of what is forecast to be a very weak fiscal second quarter for the company.
Betting the Shares Fall
The options for expiration on November 16 show an overwhelming number of bearish bets placed at the $135 strike price. There are nearly 9,000 open puts contracts at that strike price versus roughly 600 calls. The wager is sizable—worth about $6.0 million. Some bets are even more bearish, with another 9,000 open put contracts at the $130 strike price, suggesting the stock falls to $123.75.
Additionally, a further analysis of the options market using the long straddle strategy indicates the stock may trade higher or lower by 12% from the $135 strike price. It places the stock in a trading range between $120 and $151 by expiration.
The chart also suggests the stock is nearing a breakdown which could send it sharply lower. The stock is sitting around technical support of $135.50. Should it fall below support, it may drop to roughly $126.
Weak Quarter Expected
The negative sentiment in the stock currently stems from analysts consistently reducing their earnings estimates for the second quarter. Analysts now see earnings in the quarter falling 14% versus the same period a year ago. It is far worse than forecasts for a decline of 4% at the beginning of October.
Estimates for the full-year have dropped as well, with earnings now seen rising 6%. This is down from prior estimates for growth of 10%.
The average analyst price target on the stock has dropped as well to $219.58, down 4% since the beginning of October. But even that may still be too high because it is 60% higher than the current stock price.
Alibaba’s stock has fallen as the trade war between the U.S. and China has escalated, and the value of the Chinese currency the Renminbi falls versus the U.S. Dollar. But with expectations now reduced sharply, perhaps the company can provide some commentary to help boost shares.
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.