Unlock: Alibaba (BABA) Trade Idea from July 7 with Stock at $79

It pays to do fundamental research. This note was sent to clients on July 7. We already rolled calls once after booking major gains, will be booking more gains today. To learn more about our approach and how you can become a successful trader, sign up for 2 week trial and test drive live chat room with some of the best traders: SUBSCRIBE

Alibaba
Ticker: BABA
Sector: Internet Services
Current Price: $79.06
Target: $92.00
Stop Loss: $74.00
Time Duration: 106 days

Trade Idea – Buy BABA October 85 Calls for $2.40 or less.

Buyers of 5,000 August 80 calls this afternoon for $2.77 to $2.96 offer side. Approx $1.4 million bullish bet. Starting to see bullish action building in other strikes and months as well including buyers of 1,000 August (5) Weekly 80-strike calls for up to $1.92 offer. That’s the week in which the company will report earnings.

I have been long common with cost basis at $68 bought in February. New comers note this is one of my Top 10 picks for 2016, see full explanation HERE.

Back in late December 2015 when I wrote that piece, my key focus for bullishness was improving monetization rate (also called “take rate”) and Q1 earnings showed exactly that and stock gapped higher in early May. Highlights:

– Mobile GMV Take Rate +2.42% vs. +2.38% estimate, beat
– Strong Cloud Computing Growth at +175% YoY
– Tmall GMV Growth +34% YoY

But that solid quarter in the following weeks was clouded by various off the chart problems: SEC investigation into accounting practices, Softbank selling its $7 billion stake, Brexit, bunch of other little issues, none of which have any impact on core growth.

But the more I go back and look at my analysis, the more I like the story. In my original bullish thesis one thing I did not take into account was this massive cloud computing opportunity in China, in much the same way as Amazon took advantage of in this US. Morgan Stanley on June 28 raised the price target to street high at $130 implying 76% upside, primarily driven by accelerationg cloud adoption:

“We value AliCloud at US$39bn, based on 4.5x F20e P/S; our US Internet team values AWS at US$91bn by applying 5.6x F17e P/S. By F20, we estimate that AliCloud’s revenue can reach Rmb58bn, at a >89% CAGR for F16~20; – surpassing AWS’s revenue in 2015. We believe our long-term multiple for AliCloud is justified given faster growth and visible revenue opportunity. It has 500k paying customers, including half of the top 35 Chinese ‘unicorn’ Internet companies. Its value is further supported by the significant positive impacts on all of Alibaba’s businesses.”

Bottom line – I believe the market is significantly underestimating the potential here from both better monetization rate and cloud adoption. Below are short term (daily) and long term (weekly) charts. Both setting up for breakout.