Alibaba: Turbocharge your investments with the Chinese giant
The technology group impressed the markets once again with its latest interim report. A moderate valuation combined with a promising situation from a technical analysis perspective makes the stock an attractive prospect. Selected leveraged securities in Swiss DOTS make it possible to generate significant profits.
The tussle between USA and China to become the world’s leading economic superpower recently entered a new phase, as US President Joe Biden signed an executive order authorising the US treasury secretary to prohibit or restrict US investments in certain Chinese technology sectors. This once again demonstrates that Trump’s previous ‘America First’ policy is alive and well under Biden.
Exceeding expectations
Nevertheless, the East and West are closely matched when it comes to tech companies — in the e-commerce sector at least. Just a few days after Amazon released strong half-year figures, Alibaba followed suit with an equally surprising interim report. The Chinese tech giant exceeded analysts’ earnings expectations for the seventh successive quarter, and by quite some distance.
The group generated almost a fifth more profit than originally forecast, the highest upside earnings surprise in the last two years.
When comparing these figures with the previous year, profits rose by a formidable 51% in the quarter ended 30 June. Revenue also rose surprisingly sharply due to the Chinese government’s decision to ease coronavirus restrictions. Alibaba generated revenues of CNY 234.16 billion compared to estimates of CNY 224.92 billion. Improved consumer sentiment in particular encouraged shoppers to buy more and gave the company its highest growth in two years. The main contributors to this performance were Alibaba’s Taobao and Tmall marketplaces, which profited from the annual ‘618’ discount campaign.
Shaking things up
By contrast, the Cloud business on which Alibaba is pinning its hopes recorded less dynamic performance. Revenues in this division increased by just 4%, the smallest growth registered by any of the six independent business units within Alibaba Group Holding. Meanwhile, key rival Amazon grew its cloud revenues by 12%. The reverse is true when it comes to profit. While earnings in the relevant division at Alibaba doubled, they declined at Amazon. To help the cloud business perform better in future, Alibaba CEO Daniel Zhang will step down from his roles within the holding company in September to concentrate fully on the digital cloud. He will be replaced as CEO by Eddie Yongming Wu, the current chairman of Alibaba’s Taobao and Tmall Group.
A largely positive response
Alibaba shares reacted to the latest news with share price gains, while the majority of analysts also gave the stock a thumbs-up.
An evaluation of 51 reports gives an average 12-month price target of USD 140.81, equating to potential of 47%. This target does not seem excessive given the group’s current valuation.
Alibaba has a P/E ratio of 8.5x based on expected earnings for 2025, with EPS growth rates set to remain well within double digits until then. Yet not all experts are similarly optimistic. Morningstar, which sees USD 128 as a fair value for the stock, believes the Chinese retail business could experience a “turbulent” recovery due to recent macroeconomic developments such as deflation, the decline in imports in July and a lack of more significant consumer incentives. On the other hand, Citigroup (price target: USD 149) welcomes the growth in retail sales in international commerce and expects this momentum to continue over the next few quarters.
Effective trading products on Swiss DOTS
From a technical analysis perspective, the stock could soon send out an important buy signal. With the most recent upturn in the share price pushing both the 100-day and 200-day lines upwards, the shorter-term moving average could cross above its longer-term counterpart, which would create a golden cross. This would also bring a sustained breakout into triple-digit share prices within reach. Anyone looking to capitalise on this positive scenario can select the call warrant (ISIN CH1215831467) from Bank Vontobel listed on Swiss DOTS. At USD 96, the strike for this note corresponds almost exactly to the current price level, which means it is almost in the money. Share price movements are multiplied by a leverage of 5.6, and the term of the product ends on 21 June 2024. By contrast, the mini future long (ISIN CH1234566276) from UBS offers a never-ending term. This open-ended security has leverage of 4.1 and a spread of 1.5%. The stop loss is USD 21.4878, a reassuring 22% below the current price of the underlying.
If the psychologically important USD 100 mark proves to be an insurmountable hurdle, the mini future (ISIN CH1288260578) from UBS provides a fast and effective way to switch to the short side, where its leverage of 8.0 would generate above-average profits. The stop loss of USD 103.013456 allows almost 10% to the Alibaba stock on the upside.
More about Swiss DOTS
Swiss DOTS is Switzerland’s leading OTC platform for leveraged products. The Flughafen Zürich derivatives presented here are just some of more than 90'000 ideas you can trade affordably between 08:00 and 22.00 each day from CHF 9.00 flat/trade.
