BABA Stock Forecast—Reddit Traders Might Trigger a Short Squeeze

Alibaba (BABA) is the latest stock to make it to the “hall of fame” on Reddit group WallStreetBets. What’s the forecast for BABA stock as Reddit traders take interest. Is there a possibility of a short squeeze in the stock?

BABA was the largest IPO ever when it listed in the U.S. markets. However, the company went for a dual listing in Hong Kong in 2019 amid the escalation in U.S.-China tensions. It also gave U.S. markets a miss for the Ant Financial IPO. The IPO was eventually blocked by Chinese authorities.

BABA stock peaked in 2020 but has looked weak since then and is down almost 28 percent from the 52-week highs. The stock underperformed its U.S. tech peers in 2020 also. The stock’s underperformance has been largely due to the fact that it has been in the “bad books” of Chinese authorities.

Wall Street analysts are bullish on Alibaba stock. According to TipRanks, its average target price is $301.6, which is a premium of almost 32 percent over the current prices. The stock even trades higher than its lowest target price of $270. Among the 26 analysts covering the stock, 25 rate it as a buy or some equivalent, while one analyst has a hold.

While analysts have been bullish on BABA stock, the market has looked the other way. As I noted previously, the stock looks like an undervalued jewel. The stock currently trades at an NTM PE multiple of 22.7x, which is below the 28x that it has averaged since the listing.

There are several growth drivers for BABA stock including the continued momentum in the Chinese e-commerce market. The company’s cloud operations have also turned positive on the EBITDA level. For Amazon, the cloud is the most profitable business vertical. If BABA can increase the profitability of the cloud business, it will add handsomely to its earnings.

A DD (due diligence) post on WallStreetBets talked about the cheap valuations of BABA stock given its strong growth outlook. The analysts polled by TIKR expect the company’s revenues to rise 30 percent in fiscal 2022, which ends on March 31, 2022, and 21 percent in fiscal 2023.

BABA stock’s valuations look cheap given the growth outlook. The stock has been weak due to political factors. First, it's being targeted by the Chinese government. Second, there are concerns about the delisting of Chinese companies from the U.S. markets.

I find the second reason somewhat preposterous because the delisting of Chinese companies doesn't appear to be in the cards. As far as the targeting by the Chinese government, BABA seems to be “playing by the books.” It gracefully accepted the $2.8 billion fine that the Chinese government imposed. The stock rose after the record fine because markets saw it as a sign that the company’s troubles with Chinese authorities are coming to an end.

According to the data from Fintel, BABA stock had a short volume ratio of 12.5 percent on June 25, which is the highest in the last 10 days. While the short interest is lower compared to some of the other Reddit stocks, a steep rise in Alibaba stock could help trigger a short squeeze.

BABA stock looks like a compelling buy regardless of it being targeted by Reddit traders. As is the case with Paysafe (PSFE) and ContextLogic (WISH), it took WallStreetBets to shift the market's attention towards an undervalued and overlooked stock.