Alibaba Group Holdings (BABA) ADRs are off their May $134 peak as Trump's tariff pressure is on again. Analysts have lowered EPS forecasts and price targets as well. Does that make BABA a buy? Maybe, but one attractive income play here is to short deep out-of-the-money (OTM) puts.

BABA is at $108.45 per share, well below its recent May 14 peak of $134.05. Could it fall below $100? Maybe, but the put options at that strike price look particularly attractive.

Before looking at that, let's review the stock's valuation.

Lower EPS and Target Prices

Sell-side analysts now project $9.20 in earnings per share (EPS) for the year ending March 31, 2025. That is down from $10.24 EPS, as I pointed out in my May 12 Barchart article.

That could account for a big portion of the stock's weakness in the past 2 months.

Nevertheless, it means BABA is on a very low price/earnings multiple (P/E) of just 11.8x. That is well below its historical average. Let's compute that and set a price target.

The next 12-month (NTM) EPS forecast is $9.96, including the analysts' 2026 EPS forecast of $10.71. This can be multiplied by the stock's historical P/E multiple to set a price target.

For example, Morningstar reports that its historical forward P/E multiple over the last 5 years has been 11.82x. Seeking Alpha says it's been 14.6x. So, let's use an average 13.2x multiple:

  $9.96 x 13.2 = $131.47 target price

  Upside = +21.2%

But that assumes that BABA stock will rise to over 13x earnings. That would have to be after any tariff issues between the U.S. and China have been resolved.

To be conservative, let's use a lower 11.82x multiple:

  $9.96 x 11.82 = $117.73 target price

  Upside = +8.6%

The bottom line is that even using a lower historical multiple, BABA stock looks cheap here.

Analysts Agree

Yahoo! Finance shows that the average price target is $162.17, and Stock Analysis says that the 14 analysts' average is $152.16. These are substantially higher than today's price. 

The mean survey price at Barchart is $161.53 per share, and AnaChart's average of 22 analysts is $149.21.

That means the lowest analyst survey price target is still +37.6% over today's price.

As a result, using both our $117.73 P/E-based price target and the lowest analyst survey of $149.21 gives an average of $133.47:

   Upside: $133.47 / $108.45 = 1.23 -1= +23% upside

So, BABA stock is well over 20% undervalued here.

One way to play this, to set an even lower buy-in price and to get paid extra income while waiting, is to sell short out-of-the-money (OTM) put options.

Shorting OTM Puts

For example, look at the Aug. 22 expiry period, 39 days from now, just over one month and a week from now.

It shows that the $100 strike price put option, which is 7.7% below today's trading price, has an attractive midpoint put option premium of $1.91.

That means an investor who enters an order to “Sell to Open” this strike price can make an immediate yield of 1.91% (i.e., $1.91/$100.00).

So, as long as BABA stays over $100.00 for the next month or so, an investor makes a clean 1.9% yield without having to buy 100 shares at $100.00 (i.e., collateral of $10,000 is required).

But even if the account is assigned to buy BABA at $100 (if it falls to $100 or lower), the investor's breakeven is lower:

  $100-$1.91 received = $98.09 breakeven

That is 9.5% lower than today's trading price. So, this provides good downside protection, sets an attractive buy-in point, and provides a good monthly yield.

For example, if the investor can repeat this 1.92% short-put yield every 39 days, the annualized expected return is 17.28% (i.e., 9 x 1.92%).

Keep in mind that the delta ratio, which implies the probability that BABA will fall to $100 in the next 39 days, is low at just 23%. This is based on its historical trading variance.

In addition, the upside, if the account is assigned, is high:

  $133.47 / $98.09 = 1.36 -1 = +36% upside

The bottom line is that BABA stock looks cheap here, and one way to play it is to short 39 DTE puts at the $100 strike price for a 1.9% yield.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.