Happy Friday, everyone!
It’s been a long time since I’ve written about Alibaba (BABA). In my absence, a lot has happened to the Chinese e-commerce giant, some good and some not-so-good. However, sitting on the sidelines is hard when you see the kind of volume and unusual options activity that BABA exhibited Thursday.
I don’t know what’s going on with Alibaba -- China’s central bank's stimulus moves have certainly helped -- but I intend to find out.
In the meantime, Alibaba stock is up 29% in the past month as Chinese stocks have gone on a tear. This past week was the best since 2008 for Chinese stocks. BABA’s gained 18% over the past five days.
As for its unusual options activity on Thursday, there were so many that I gave up counting. I know it had 11 with Vol/OI ratios of 10 or greater yesterday (See below). Here are my three best bets from the top 11.
Have an excellent weekend!
For Income Investors I Like I Like the Oct. 4 $100 Put
With eight days to expiration, BABA stock closed trading 5.1% out of the money. The bid of $1.12 is an annualized return of 50.2%. The Vol/OI ratio of 30.55 was the third-highest yesterday but only the 17th-highest for volume at 5,926.
Who was buying? Not any big fish. Of all the trades with 10 contracts or more, only four were for 100 or more. That suggests retail investors were the big buyers and sellers of the Oct. 4 $100 put.
It’s incredible that despite the gains in 2024, Alibaba’s stock is down 66% from its October 2020 trading level.
While there’s been a lot of water under the bridge over the past four years, its revenues and operating income have grown by 86% and 40%, respectively, between fiscal 2020 (March year-end) and the latest 12 months ended June 30. At the same time, its Q1 2024 operating income of 39.13 billion Chinese yuan ($5.58 billion) isn’t too far off last year’s number and better than Q1 2022, Q1 2021, and Q1 2020.
Note: I’m using financials from S&P Global Market Intelligence, which differ slightly from Alibaba’s Q1 2024 press release. They've excluded some one-time items from its general and administrative expenses, increasing the operating income by 3.14 billion Chinese yuan ($447.8 million).
With strong momentum, it’s a smart income play. In the worst-case scenario, you buy the shares at $100 and hold them for the long haul.
The Long-Term Play
I consider DTEs (days to expiration) of 31 days or greater to be long-term plays. Of the 11 unusually active options yesterday, three calls met this criterion: Nov. 15 $130 (51 days), Dec. 20 $135 (86 days), and Jan. 17/2025 $140 (114 days).
When looking for a long-term play, I like the highest DTE possible: the $140 call. It had an ask price of $2.00 and a down payment of 1.4%. That compares to a 1.5% down payment for the $135 call, which also had a $2.00 ask price.
Some might consider the $135 the better bet because the exercise price is $5 less, meaning it only has to appreciate by 30.4% [$135 strike + $2.00 ask price - $105.07 closing price / $105.07] compared to 35.1% for the $140.
However, the $140 gives you four more weeks to get there, which I consider a worthwhile tradeoff. Plus, the $140 delta is 0.15497, which means the call only has to appreciate $12.91 (12.3%) for you to double your money by selling the call before expiration. It’s a good fallback position.
Worst-case, it’s a $200 loss per contract.
How’s the Business?
According to Barchart’s data, BABA is a Strong Buy (4.65 out of 5), with 14 out of 17 analysts giving it this rating. However, the mean target price of $105.02 is right about where it’s currently trading, while the median target price is $112.60.
The South China Morning Post (SCMP) published an article this morning discussing Alibaba’s ongoing turnaround.
“Alibaba may gradually become more attractive to some long-only funds because it is, after all, the largest e-commerce stock in China,” SCMP reported comments from Shawn Yang, senior analyst at Arete Research. “The expectations of macro improvement may be passed on to these consumer stocks. Alibaba is the largest among them, and its situation is improving."
Billionaire David Tepper, a better investor than NFL owner, has been buying Chinese stocks recently, including Alibaba.
Like Amazon (AMZN), Alibaba is about more than just e-commerce, and investors aren't reflecting this reality in its share price. As investors realize that its cloud business, for example, is worth more than what investors currently value it, BABA stock will move higher.
Patient capital should do well with Alibaba in 2025 and beyond.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
