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NEW STOCK IDEA, (BABA)

Alibaba is the largest e-commerce company in China, with a dominant market share in online retail and online payments.. The company has a massive user base and a vast network of merchants and customers, providing a strong competitive advantage and dominant market share. Alibaba's revenue and profit have been consistently growing over the years, driven by its core e-commerce business and other fast-growing segments such as cloud computing and digital media. The company's revenue in 2021 was over $109 billion, and its net income was around $20 billion.


Looking into some technical data on Alibaba, it would appear current market prices ($?) are quite undervalued considering the strength of their market and financial position. Fig.1 shows price to operating cash flows, where we can see the market price ($82.96, black line) trading considerably lower than the OCF line (blue, $178). The recent sell off triggered by the pandemic and ongoing lockdowns in China, appears to be flattening with price projections rising once again by 2024. If the market price remains correlated, we can expect a surge in prices in the next 12-18 months.


Price to operating cash flow comparison (Fig.1)


At the time of writing, we are trading at 2014 prices however revenue is up around 1300% since 2014 from $8.9Bn to current revenue of $109Bn.


Fig 2. also shows a similar correlation in adjusted earnings to price ratio where we can see (as expected) a similar pattern as price to OCF, however more extreme. We are a long way below the adjusted earnings line (blue) and can expect some form of mean reversion.


Price to earnings comparison (fig.2)


Daily candlestick chart (fig 3.)

As we can see looking at a candle stick chart, stochastics appear to have found a bottom and look ready for an upturn, although no 'buy' signal has presented itself on the MACD as of yet therefore leveraged investors should remain cautious of the possibility of a move back towards $75.


Strategy:

For investors buying ordinary shares, the market appears to be trading at value prices, and if we were to get any prolonged dip, it would only be considered an opportunity to cost average down.

For leveraged positions: For the time being the market remains structurally bearish therefore the possibility of moving back towards the October 22 lows remains in place. However, weekly support at $58 would be a line in the sand from a technical perspective if we were to cut losses. The preference would be to utilise intraday (4HR) support at $74.5 in order to keep losses / drawdown far less than the 30% drop back to weekly support. If this were taken, I would remain patient and look to re enter as the fundamentals point towards a large bullish move in 23/24.

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