Alibaba Group Holding Ltd: BABA Stock May Be Setting Up for Major Breakout

Alibaba Group Holding Ltd to Reap Focus on Consumers 

The share price of Alibaba Group Holding Ltd (NYSE:BABA) has languished in a sideways channel since breaking out in April 2017.

But longer-term investors might want to keep Alibaba stock as a core foreign holding in their portfolios, as the tailwinds supporting a higher share price are growing.

Alibaba will benefit from China’s major economic strategy to drive consumer spending and place less reliance on imports. The nasty trade war with the U.S. is clear evidence of why China wants to reduce its trade dependence.

Consumer spending as a percentage of China’s gross domestic product (GDP) is much less than the 70% in the United States. If China can successfully drive consumer spending much higher, the impact on domestic retailers and online powerhouses like Alibaba will be significant.

Why Cloud Will Drive BABA Stock Higher 

Alibaba reported its fiscal second quarter on November 1, and it was impressive, reaffirming my bullish story for Alibaba stock.

In the quarter, the company reported year-over-year revenue growth of 40%, including impressive organic growth of 37%. (Source: “September Quarter 2019 Results,” Alibaba Group Holding Ltd, November 1, 2019.)

The company’s core commerce business grew at 40%, accounting for 85% of total revenues. Given China’s focus on growing consumer spending, Alibaba, with its leadership position, should easily benefit from this shift.

Alibaba also recorded a whopping 785 million mobile monthly average users (MAUs) in the quarter.

Moreover, the wildcard for BABA stock will be the company’s growth in its high-potential cloud business, which grew by 64% year-over-year in the quarter but accounted for only eight percent of the company’s total revenues. Alibaba’s cloud business is in its infancy and should accelerate.

A Breakout From Multi-Year Channel? 

Alibaba stock has largely drifted sideways since breaking $115.00 in April 2017.

The below chart shows decent support for BABA stock around $150.00. The stock just flashed a bullish golden cross pattern, with the 50-day moving average breaking above the 200-day moving average.

Chart courtesy of StockCharts.com

Alibaba stock is hovering at a key level, just below key resistance at $178.00 to $180.00. A breakout could see BABA stock retest its 52-week high of $195.72 and its resistance at $200.00, last encountered in June 2018.

Analyst Take

The tailwinds for Alibaba Group Holding Ltd in China are obvious. The country has a massive middle class, armed with newfound wealth and ready to spend.

While an economic slowdown could delay the shift, the long term is bullish for Alibaba stock.