The Chinese regulatory crackdown that began in Q4 last year put massive bearish pressure on Chinese tech stocks, with many falling up to 60% in only a few months.
Short-term, it’s easy to understand that investors get spooked by this move from the Chinese government and policy makers due to a lack of transparency. But looking at history, this isn’t the first time, but also happened in 2011, 2015 and 2018. However, the markets recovered rather quickly, producing triple-digit percentage returns in the years to follow, potentially rendering the current event a good opportunity to go hunting for Chinese stocks.
This brings us to one of the world’s largest retailer of present-day, Alibaba Group Holdings (NYSE: BABA) which is mostly know for the wholesale platform Alibaba.com, but the group also owns an array of other businesses such as AliExpress, Tmall, Taobao, Lazada, Youku and more (Source: Alibaba Group).
Despite the earlier crackdowns, Alibaba has been able to put in an impressive bull run since it’s IPO in 2014 (one of the biggest in history), not only in terms of the stock price, but also revenue-wise with 2015 and 2018 barely affecting the revenue graph as you can see below.
(Revenue million Chinese ¥, Source: Statisa)
So historically, it’s not unlikely that this time won’t be any different. After all, if there’s one company that literally can afford unlimited costs when it comes to matters of compliance, it’s BABA with more than 800 million active customers, rock-solid balance sheet and monster pile of cash readily available.
Without doing a deep dive into the company financials, even if the regulatory crackdown has spooked markets short-term, history shows that Chinese tech stocks were relatively quick to recover each time.
There are no guarantees, but history tends to repeat itself and from a price action perspective, we think that BABA is starting to get into an attractive area from a structural price action perspective.
BABA peaked around $320 in October last year, right before the regulatory crackdown, after which the stock lost more than 50% of its value.
Short-term, from a technical perspective, the stock is showing a bearish exhaustion followed by a bullish reaction which for now, looks like a mean reversion.
This bullish bounce however is not supported by strong volume which makes us believe bears might stage a comeback in recent weeks/months. If that happens, it’s likely the stock could continue to slide further down towards the long-term key support between $130-$143, an area we think makes a great location to start building a long-term position in BABA.
Looking at the options open interest and volume, we see about 2.6M calls and 1.9M puts with only 9% of the options rolling off this Sep op-ex. Option support should start to materialize around $160.
FULL DISCLOSURE: Chris Capre currently has no stock or option position in BABA. If you’d like to learn more about Chris’s trades and positions, you can get access via the Trading Masterclass where he shares his live trades, further investment ideas and daily market analysis.