Interactive Investor

Chart of the week: my aggressive price target for Alibaba shares

8th August 2022 12:40

John Burford from interactive investor

An 80% drop from its peak offers a chance to buy this Chinese giant on the cheap, believes analyst John Burford. The price could surge if it breaks above this level.

This mammoth Chinese e-commerce operation – founded by the now exiled Jack Ma – has fallen on hard times. Despite huge investments, Alibaba (NYSE:BABA)'s money-losing cloud services efforts are failing – especially when compared with the highly profitable cloud offerings of its US equivalents such as Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), which dominate the cloud services sector.

The growing negative mood around this company has clobbered the share price and it has tumbled off its October 2020 high at $320 to the March low of $72 – a collapse of almost 80%.

Discover more: Buy international shares | Interactive investor Offers | Most-traded US stocks

Many investors have come to the view that because the company still relies for profits on its 20-year-old e-commerce business model, which is getting very long in the tooth, it has had its day. And it has failed to come up with a profitable idea that can take over when they believe e-commerce is winding down. Hmm.

Here is the sorry price chart:

Past performance is not a guide to future performance.

The 22-month bear trend has been traversing my excellent tramlines with very accurate touch points in what appears to be an a-b-c three wave pattern. Recall, a three-wave pattern is corrective to the one larger trend – in this case, up.

Also, the March low at the $72 mark was made on a strong momentum divergence – a sign that the relentless selling pressure was being absorbed by the 'smart money' as the low was approached and gave rise to the strong bounce to the upper tramline which was hit early last month.

This strongly suggests the shares should start a rally phase in the near future. And because it is always the case that the news follows the market (and not vice versa), if a rally can develop, we shall see better news emerging.

One possibility is that the digital payment app Ant will be allowed to go ahead with its delayed IPO (Alibaba owns a hefty chunk) and recent signs are pointing that way. Confirmation would, I believe, send Alibaba stock surging.

Also, any signs the government will be adding stimulus to the battered-down housing sector should improve sentiment towards equities.

There remains a considerable short interest in Alibaba stock, although not as high as in last year, and a short squeeze could develop.

Thus, the shares are trading near a low and, if the upper tramline can be penetrated, my main target is in the $180 region.

A move below the $72 low would amend my short-term view, but present an even better buying opportunity.

John Burford is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.