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%.

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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.

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