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.