Alibaba's Earnings Just Changed Everything for the Stock

Key Points

• Alibaba's new quarterly results show investors why this Chinese stock is above all others, defying the risks and uncertainty played by tariffs.
• Wall Street analysts now see double-digit upside in the company's future.
• Institutional capital bought in, and short sellers are turning their positions away.

It’s not easy being an investor, and markets like today’s S&P 500 make it even harder for the average participant, seeing all the abrupt volatility and whipsawing prices on the back-and-forth changes brought on by negotiations between the United States and China when it comes to trade tariffs. 

One week, terms are reasonable and bullish for the economy, but the next, not so much, and markets surely make a point to express themselves in this wild and frictionless market today.

That being said, it is obvious that the Chinese stock market has endured the most painful outcomes during this saga, filled with uncertainty and negativity from investors all over the world. This is why some of Asia’s powerhouse stocks, even those in the technology sector (the country’s fastest-growing area), have seen their prices disconnect further from their true value.

That’s not a problem for value investors, though, as they understand this is where opportunities are typically found. After a better-than-expected quarterly earnings report, an opportunity has been reaffirmed in shares of Alibaba Group NYSE: BABA, one of China’s most exciting names and arguably one of its strongest when it comes to a risk-to-reward ratio, where the stock has likely already left the worst-case scenario behind it at much lower prices.

Alibaba Turned Its Head to Tariff Fears

Even though the bulk of these tariffs targeted China’s economy, it seems that Alibaba is doing just fine on its own accord. The reason is that, even though the company’s E-commerce platform is surely going to be affected by tariffs, Alibaba is much more than just a retail play; it’s an artificial intelligence and cloud computing play in the making.

Having data centers all over Asia, and even some European and Middle Eastern regions, Alibaba has a pulse on some of the world’s fastest-growing middle classes, taking a page out of Amazon’s textbook to obtain some of the most valuable consumer trend information to develop solutions for them.

Both consumers and businesses will likely seek Alibaba as their cloud solution, considering that its presence is now more pronounced in these regions than that of other leading cloud providers and companies. But that’s where the financials will come in just a minute.

For now, investors should rest on the fact that Alibaba’s price action (leading the stock to 84% of its 52-week high) has gotten it above other blue-chip Chinese stocks like Baidu Inc. NASDAQ: BIDU, and even some leaders in the United States like Alphabet Inc. NASDAQ: GOOGL. Far from following a sort of hype around the stock, there are actual fundamental reasons for this market preference heading into Alibaba today.

Financials Turned Out Better Than Ever

There has to be a good reason for up to $3.8 billion in institutional capital to have chosen Alibaba as a top pick as of this current quarter (including April and May). That reason might be rooted in the company’s quarterly financial results, which surprised everyone.

Starting with revenues, Alibaba reported a net revenue growth of 7% over the past 12 months. While this wasn’t the company’s hottest reading, it is surprisingly high for a name that is supposedly being negatively impacted by a global trade war centered around China’s economy.

Alibaba’s resilience is reflected in its double-digit revenue growth across all its segments. From logistics to cloud computing, Alibaba reported attractive growth across the board, all during a time when China’s economy is thought to be at the bottom of its cycle.

Knowing that this is likely the worst the company will do regarding growth, with an open field ahead once the economy comes to full swing, Wall Street analysts decided this stock was too good to pass up for a reputational win.

A new optimistic view came from Gary Yu, an analyst from Morgan Stanley. Just the day before the company was set to announce its quarterly earnings results, Yu decided to place a valuation target on Alibaba stock of up to $180 per share. From where Alibaba sits today, this valuation would imply it can rally by as much as 46.3%.

Offering this much upside right after a red-hot growth rate across the board has sent some short sellers running, knowing that the stock has even more reason to start heading higher today. Investors can see this at play with a 10.1% decline in short interest for Alibaba over the past month alone, a clear sign of bearish capitulation.