Why Alibaba’s Stock Faces More Declines Ahead

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Alibaba Group Holdings Ltd.'s (BABA) stock has been in a terrible downtrend with shares falling by 22% from their mid-June highs. Now shares are facing an even steeper decline of up to another 8% based on technical analysis, from the stock’s current price around $163.50.

That is not all, options traders are also betting that shares of Alibaba fall by the middle of January by about 8% as well.

BABA data by YCharts

The bearish sentiment is clear on the technical chart with the stock in a downtrend. Additionally, the stock is falling below technical support around $166.60. That means the stock may drop all the way to $151.50 from its current price. That is where the next level of technical support rests.

The relative strength index has been trending lower since peaking at an overbought level above 70. With the RSI trending lower, it suggests momentum is leaving the stock. (For more, see also: Alibaba's Stock Is Underavlued: Raymond James.)

Options traders are bearish on Alibaba too. The $160 put options set to expire on January 18 outweigh the call options by more than 2 to 1, with 17,000 open put options. With the options trading at a price of $10 per contract, the stock would need to decline to $150, for a buyer of the puts to turn a profit. It is not a small wager either, with the open put contracts valued at roughly $17 million.

One reason why investors and traders are so bearish is the weak earnings outlook. Analysts have slashed their earnings outlook for the fiscal second quarter of 2019 by 10% over the past month. Analysts now forecast earnings to decline by almost 4% versus the same period a year ago to $1.25. Meanwhile, revenue forecasts have dropped by more than 5% and are forecast to rise by 56% to $13 billion. The disappointing outlook follows a fiscal first quarter.

BABA EPS Estimates for Current Fiscal Year data by YCharts

Full-year results aren't much better. Analysts have cut their earnings estimates by more than 8% and forecast earnings to grow by 11%. Meanwhile, revenue forecasts fall as well, by 3%, but are still expected to rise by almost 49% to $58.46 billion. (For more, see also: Why Amazon's Stock May Continue to Outperform Alibaba's.)

Throw in the U.S. and China trade tensions and investors have plenty of reasons to be bearish on Alibaba. If the traders and technical charts prove to be correct, then the stock still has further to fall.

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.