After missing on revenues Alibaba (BABA, quote) is taking a beating that comes when expectations are high. But is the multiple? At current pricing on E’16 BABA trades around 25X EBITDA or a major discount to Amazon.

AlibabaWhat is ironic here is that if Amazon (AMZN, quote) reported these same results the street would be applauding the profitability and the user growth. With Baba everyone wants to see the power of the Chinese e-commerce evolution to be cartoonish in its depiction. The problem is it just can’t be.

China (FXI, quote) is moving towards a consumption economy and some say the economy will move from 7.5% to internet consumption to 13% internet consumption by 2020. Alibaba right now has 83% of that model. Logistics, cultural headwinds and the government mean there will be choppiness in that development. This is not the same as Facebook's (FB, quote) dash toward mobile and ensuing revenue growth from mobile.

How to trade it:

BABA is not broken as the stock chart might suggest but let’s look to the stock chart and discuss a strategy. $88.00 is a key level to watch today and see if the stock can hold. This morning we have bounced off $88 as markets digest the numbers and evaluate the impact of the SAIC regulator report and fear of greater scrutiny on the business.

Alibaba Jan 29

If you added to the stock yesterday on the pre-earnings regulatory fear down tic, a break of $88 may be your place to stop loss -10%. When investing in a company with the volatility profile of BABA you need to give yourself a slightly wider stop-loss approach than you would with an index or ETF or even lower volatile profile stock. But despite our view that these numbers were fine and that we were impressed with the improved profitability margins and the user growth you can’t fight what you do not know.

$84 is the next level to watch in the stock and this is where it settled back to on the lows post IPO. We must watch the governance issues around the stock but take a view that the market is punishing BABA on the perception of what they don’t know, not on specific concerns regarding the government attacks.

The market is currently punishing any company that misses on top line growth when growth is the question that nags at the world. When you are buying Alibaba, you are conceivable buying a company that has phenomenal growth tailwinds and ultimately you want to see becoming more profitable and leveraging its platform.

The company is now 1 for 2 in terms of delivering on earnings and we are not ready to throw in the towel. In fact, with a 12m target of $124 the stock offers significant upside form here but we must listen to management address these numbers and the regulator concerns before ratifying what was yesterday’s view.


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