Alibaba Group Holding could be a standout stock in 2017, a year most banks expect the broad stock market will post only incremental gains.
Analysts are starting to conclude that the Chinese technology giant may surge in the coming year. Just recently, Morgan Stanley told clients that the $92 stock (ticker: BABA) has about 40% upside. This will strike some investors as an example of Wall Street tailoring a narrative to sell stock to investors who are worried that President-elect Donald Trump’s expected protectionist policies could hamper China’s market, but that view is too cynical.
While Trump’s policies are a risk, Alibaba is far more than a Chinese version of eBay(EBAY) that sells stuff online. The company stands to dominate China’s e-commerce market, cloud computing, and perhaps even financial-services markets.
“We believe that Alibaba is in the early stages of unlocking the value from what we view as its most valuable asset – a rich database that continues to accumulate from its well-controlled and extensive closed-loop ecosystem, through advancements in data technology,” Morgan Stanley’s Grace Chen and her team said in a Dec. 7 report.
According to the bank, Alibaba is worth $130, a price target that reflects $114.90 for its e-commerce business, $7.80 to its strategic investments, and $7.70 for its Ant Financial unit.
Intrigued investors can consider two trading strategies.
With the stock around $92, investors can simply sell put options to position to buy the stock on a pullback. The February $85 put could recently be sold for $1.82. If the stock keeps advancing – shares are up about 15% this year – investors can keep the put premium. Should shares trade below the strike price at expiration, investors should buy the stock rather than cover the put because the stock has a bright future.
Investors who already own Alibaba, and those who want to buy the stock, can monetize Morgan Stanley’s $130 price target by selling the January $130 call that expires in 2018 for $2.34.
Anyone who buys the stock and sells the call is implementing a “buy write” strategy. If you own the stock and sell the call, it’s called “overwriting.” Both strategies have similar profiles insofar as investors get paid today for agreeing to sell stock at $130 at the January 2018 expiration.
Should the stock fail to hit $130, investors get to keep the call premium and their stock. The key risk is that the stock surges far above the $130 strike price. If that happens, investors miss out on the additional upside, though they would have locked in a nice gain nonetheless.
This columnist has been bullish on Alibaba since its September 2014 initial public offering. The IPO price was set at $68, and it surged to a high of $119, and then dipped down to about $59. Throughout the weakness, we advocated buying the stock and selling puts.
We are thus glad to see sell-side analysts starting to realize that Alibaba is a company of great potential and scope. This should become even more evident as Alibaba emerges from China’s shadow. In many ways, the company is acting like a corporate-nation that is using its organizational strength, and money, to redefine the world.
Just recently, Alibaba Executive Chairman Jack Ma signed a letter of intent with Thailand Deputy Prime Minister Somkid Jatusripitak. Alibaba will help Thailand develop a digital economy and a logistics network, and also help establish the nation as a digital technology and regional data hub for Southeast Asia.
In time, Alibaba will likely make even bolder moves to help stitch together fragmented markets. These trades express confidence in the company’s future.