Company / Analytics

Analytics, 11 November 2020

Tech stocks sell-off: Alibaba and Tesla

The stock market has seen a new uptrend since last week’s bullish price action. A potential market rotation is happening as the coronavirus trade that made work-from-home and social distancing stocks the leaders is suddenly losing flavor. The tech-heavy Nasdaq has been leading the Coronavirus stock market rally, rising 28.8% for the year through Tuesday’s close compared to the S&P 500 which is 9.8%, and the Dow Jones 3.1% rise year to date as of November 10.

However, the Nasdaq fell sharply for a second straight day Tuesday, and investors are looking into other sectors following advances in vaccine development. Notably Alibaba and Tesla lost significantly. Read out latest insight to find out why.

Covid-19 stock market rotation

Covid-19 is driving market rotation this week, which is likely to continue in the weeks to come. According to data from John Hopkins University, the cumulative number of confirmed coronavirus cases in the U.S. topped 10.4 million on Tuesday while total virus-related deaths rose past 244,000. The cumulative total of confirmed worldwide cases topped 51.3 million Tuesday, with more than 1.27 million virus-related deaths.

On Tuesday, a volatile market rotation driven by a sell-off of major tech stocks led stock futures higher. The Dow advanced 0.9% or 262 points, the S&P 500 fell 0.1% while the tech-heavy Nasdaq composite sold off 1.4%. The market rotation continues to impact leading technology stocks which fell on Tuesday, including Apple (fell 0.3%) and Microsoft (slid 3.4%). Other tech leaders Alibaba, Advanced Micro Devices, Nvidia, and Tesla also tumbled on Tuesday.

Alibaba stock

Alibaba plunged 8.3% after Chinese regulators issued draft rules aimed at preventing monopolistic practices by internet companies. Shares fell decisively below their 50-day moving average line and more than 7% below the 299.10 flat-base entry. Investors should cut their losses short if a stock falls more than 7% below the correct buy point.

Alibaba shares continued to be under pressure in pre-market trading on Wednesday, falling 1.7% despite an upbeat start to the e-commerce giant’s annual “Singles Day” event, with more than $56 billion in orders as of Wednesday morning.

When it comes to liquid, mega-cap stocks in China, it’s hard to find a more compelling name than Alibaba. The stock has been a big winner since its IPO in September 2014. The stock is still worth considering despite its recent issues such as the suspension of Ant IPO or the fallout between its founder Jack Ma and Chinese authorities.

China has long sought to support the growth of its homegrown internet leaders to boost their ability to compete with their global rivals. However, in the process, companies like Alibaba and Tencent have become dominant within China. The Chinese government now appears to be turning its attention to fostering domestic competition.

Thus, Alibaba Tencent and JD.com could all face greater opposition as they look to expand within China in the coming years. Investors now must factor these risks into their outlooks for China’s internet leaders. Their stock prices, in turn, are being adjusted downward by the market.

The current consensus among 56 polled investment analysts is to Buy stock in Alibaba Group Holding Ltd. This rating has held steady since October, according to CNN Money. The 53 analysts offering 12-month price forecasts for Alibaba Group Holding Ltd have a median target of 2,330.64, with a high estimate of 2,608.87 and a low estimate of 1,984.20. The median estimate represents a +778.96% increase from the last price of 265.16.

Tesla stock

Tesla stock skidded 2.6% Tuesday, adding to Monday’s 2% decline and extending a losing streak to three sessions. Shares fell further below their 50-day moving average line, as the stock continues to build a base with a new buy point at $466. Shares are about 13% below the entry.

Two things likely led to Tesla’s shares price fall. First, Tesla is responding to complaints from the National Highway Traffic Safety Administration about component failures that rendered some touchscreens in older-model Model S and Model X vehicles useless. Tesla is acknowledging the issues and will reimburse some Model X and Model S owners to cover issues with a memory device that caused touchscreen blackouts, according to CNBC. Tesla will also expand its warranty to include that issue.

On the one hand, this implies added warranty expense for Tesla, which could bring profits down. However, Tesla going the extra mile to take care of its customers is a positive thing for the company, and likely to improve customer loyalty and confidence in the company.

Second, which is a more serious issue, is that Tesla is having some difficulty obtaining permits to complete construction of its Gigafactory Berlin in Germany. The company is depending on this factory to support sales of its Model Y crossover in Europe, and construction delays could throw a monkey wrench into that plan.

Tesla anticipates having Gigafactory Berlin ready to go by July 2021, and Elon Musk is already getting personally involved in trying to straighten out the permit’s situation.

These are issues that will soon be remedied, and the stock is likely to rise seen an upward trend again. The consensus among 36 polled investment analysts recommends holding Tesla stock, according to CNN Money. The 33 analysts offering 12-month price forecasts for Tesla Inc have a median target of 400.00, with a high estimate of 800.00 and a low estimate of 40.00. The median estimate represents a -3.28% decrease from the last price of 413.56.

Outlook: What should investors do next?

During market corrections, investors should be building watchlists of potential stock leaders. Now it’s time to put those watchlists to work.

Investors should use the recent strength as a go-ahead to buy new breakouts. Start slowly with new purchases and see how they perform. After raising cash during the recent correction, don’t rush to be fully invested all at once. Try some new buys. If they work, you can add to them; if not, you can back away. In particular, focus on stocks with strong relative strength compared to the market.

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