Alibaba (NYSE:BABA) has taken a beating since the beginning of November. Part of that 12.6% BABA stock sell-off had to do with the scrapping of the Ant Financial initial public offering.
But part of it has to do with concerns over a new U.S. bill that threatens to delist Chinese stocks from American exchanges.
None of these market concerns have anything to do with Alibaba’s underlying business, which happens to be booming. It’s unlikely these concerns will ultimately have any impact on Alibaba’s stock price five or 10 years down the road.
President Donald Trump will likely pass the Holding Foreign Companies Accountable Act before he finishes his term. The law would ban Chinese stocks from trading in the U.S. if the companies fail to meet strict auditing standards within three years.
Non-compliant companies would be barred from trading on the Nasdaq, the NYSE and even the OTC market.
The bill has already passed the House with bipartisan support and it will likely do the same in the Senate. However, Chinese stocks like Alibaba won’t disappear from U.S. markets any time soon. In fact, concerns over delisting have created a buying opportunity for investors.
BABA Stock a Political Pawn
It has been a difficult year for the world thanks to the pandemic. Right or wrong, there is a lot of animosity out there toward China these days.
It has also been an election year in the U.S. Politicians are jumping at a chance to appear “tough on China.” The ringleader of anti-China politics has been President Trump.
Trump has made his trade war with China a centerpiece of his presidency, but just because Trump will be leaving office in January doesn’t mean relations between the U.S. and China will immediately return to normal.
The Joe Biden administration will certainly attempt to ease tensions between the U.S. and China. The two nations will have three years to negotiate a compromise on delisting.
Alibaba’s Potential Loopholes
Even if the law is passed and enforced, it may be difficult for U.S. regulators to crack down on Alibaba. American investors don’t actually own shares of Alibaba, the Chinese e-commerce and cloud services giant.
Instead, BABA stock represents shares of Alibaba Group Holding Corp. Americans own shares of a variable interest entity (VIE) headquartered in the Cayman Islands, not in China.
In other words, U.S. securities laws may be one step removed from Alibaba itself. That separation could make it nearly impossible for U.S. auditors to legally gain access to anything other than the books of the VIE.
At the same time, Alibaba created some major flexibility when it launched a dual listing in Hong Kong last year. If it appears the U.S. crackdown is serious and Chinese companies will no longer be able to directly list in the U.S., investors can expect American brokers to spring into action.
A handful of U.S. online brokers already allow customers to buy shares of stock listed on foreign exchanges. One of the unintended consequences of delisting international stocks on U.S. markets is that more U.S. brokers will simply allow customers to buy them on international markets.
In U.S. regulators ultimately delist Alibaba, American investors will have three years to sell their BABA shares and find a broker that will allow them to buy Alibaba’s 9988.HK shares directly on the Hong Kong market.
Alibaba Could Comply
Perhaps the most likely outcome of the entire scenario is that Alibaba will simply comply with the new regulations. The company has repeatedly said that it stands behind the integrity of its accounting.
Alibaba has previously been investigated by the SEC back in 2016, and there were never any bombshell revelations or allegations stemming from that investigation.
In my opinion, suspicion over Chinese stock accounting is one of the biggest reasons why Alibaba shares are trading at 21.3 times forward earnings. Meanwhile, Amazon.com, Inc. (NASDAQ:AMZN) is trading at 70 times forward earnings.
American investors don’t trust Chinese companies. Alibaba and China may see this crackdown as an excellent opportunity to prove to the world they have nothing to hide.
If U.S.-approved regulators sign off on Alibaba’s books, American investors may start looking at Alibaba’s discounted valuation and 30% revenue growth in an entirely different light.
BABA Stock Is Not Getting Delisted
China does not want the world to see its top tech companies barred from trading in the U.S. because of sketchy accounting.
At the same time, Wall Street doesn’t want to lose out on the cash cow of Chinese stocks. After all, Alibaba’s U.S. investment bank IPO underwriters reportedly earned $300 million in fees.
China doesn’t want Alibaba delisted. Wall Street doesn’t want Alibaba delisted. Alibaba investors don’t want Alibaba delisted. And Alibaba doesn’t want Alibaba delisted.
There are plenty of paths and plenty of time for Alibaba to avoid delisting. In the meantime, investors should be happy the delisting drama has created a buying opportunity.
On the date of publication, Wayne Duggan held a long position in BABA.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
