Stock of the Week


November 20th 2018



Industry: Chinese E-commerce

Price as of 11/19: $149.50


After a 10% correction in October, the second 10% correction for the year, the markets have rebounded heading into the seasonally strong Year End and Thanksgiving. Even though the markets have rebounded, money is starting to move around to different sectors. At the end of September, technology was the best performing sector up over 15% for the year after rallying 40% last year. However, tech and the FAANG stocks have taken a breather in the last month falling to the second best sector year to date. Among the FAANG stocks, Facebook is down 36%, Apple down 15%, Amazon is down 22%, Netflix is down 32% and Google is down 16% from their respective 52 week highs. The semiconductors stocks are even worse with Nvidia down 43% in less than two months. With money rotating out the tech sector, other sectors should perk up. The financials and the energy sectors remain two of my favorite sectors, but heading into the New Year, the International stocks and sectors may see money inflows. The International markets and in particular, the Emerging Markets or Asian countries have seen double digit declines this year. President Trump's trade tariffs have not helped. A new round of 25% hikes on $200 billion in Chinese products could go into effect with the start of 2019. However, if the two countries come to some agreement between now and the end of December, we could see a nice rally in the International markets to start the New Year.

Whether the new trade tariffs go into effect or not, many Chinese stocks are already pricing in a lot bad news and it won't take much good news to get these stocks moving in the right direction again including this week's featured stock, Alibaba. Alibaba is the Amazon of China. Alibaba is down 27% from the June highs as the trade tariffs and lower gross margins have slowed sales and earnings from their torrid pace. Profits for the full year are only expected to be up 8% year over year, but estimates for 2019 so far are projecting Alibaba's profits to reaccelerate to 30% growth. Alibaba currently touts 601 million annual active consumers and 666 million monthly mobile users. 80% of Alibaba's revenue comes from its core commerce segment, but their other businesses are becoming bigger and bigger. Alibaba's cloud business grew 90% year over year in the last quarter, to 5.67 billion RMB ($825 million), and their media and entertainment was up 24%, to 5.94 billion RMB ($865 million).

Recently, Alibaba's stock has improved thanks to earnings that were not as bad as expected and a strong Single Day (Nov 11th) sales day. Alibaba has plenty of growth potential going forward as China's retail market is worth $5 trillion. Currently only 15% of China's total $5 trillion retail market is online. In the latest 13F filings, a number of hedge funds are buying up millions of shares of Alibaba. A good sign that the smart money is nibbling at Chinese stocks. The analysts, while cognizant of Alibaba's short-term problems, still see long term growth in tact and maintain price targets above $200 a share or 30% upside for the Chinese E-commerce giant. Alibaba may continue to face short term headwinds, but longer term the fundamentals are strong and the Alibaba's stock looks to have great risk reward.


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