Shares of Chinese online retail giant Alibaba (NYSE:BABA) are down roughly 20% in the past three months. The company faces a double whammy with its potential delisting from the US stock exchange and Chinese regulators‘ clampdown on its business. Despite being a fundamentally strong company, BABA stock continues to be weighed down by external forces. Its regulatory troubles are likely to stretch out for the next few months, which will continue to weaken BABA stock.
Alibaba is coming off one of its most successful years, despite the pandemic-led market slowdown. The last couple of quarters have been solid for the company, recovering well from the sluggishness in demand in March last year. In fact, for the past seven quarters, the company beat analyst estimates by a comfortable margin.
Moreover, its cash balance of more than $60 billion dwarfs its debt of $21.2 billion. Hence, cut out all the hullabaloo, and Alibaba should have another exceptional year. However, it appears that its regulatory troubles have a lot of weight behind them. This will impact its position as we advance.
Regulatory Woes and BABA Stock
Alibaba is at the center of two different probes by the Chinese authorities on its core and affiliated business. The first is an anti-monopoly investigation against the company’s practices of compelling sellers to sign exclusivity contracts. This practice has been vehemently criticized by the Chinese retail industry while a senior Alibaba executive deemed it a “standard practice.”
The other probe is against its affiliate fintech company called the Ant Group. It was set for a blockbuster IPO until it was suspended dramatically by the Chinese authorities late last year. China’s central bank wants the company to implement stricter financial control over its banking services.
Ant Group started as merely a payment provider for Alibaba’s users back in 2004 but has become a holistic virtual financial service provider. It connects 730 million monthly users to secure loans, seek insurance plans and invest in financial products.
However, the Chinese financial watchdogs believe that the company should pull back from its wealth management, insurance, and credit operations. The government wants it to set up a separate company that ensures compliance and capital adequacy. Moreover, it also needs to be more transparent about its transactions and operate as a wholly licensed financial institution.
A pullback is likely to severely weigh on Ant’s revenue as these operating segments in question contribute 55.4% collectively to the business’ revenue.
Many believe these measures directly result from Alibaba’s founder Jack Ma’s criticism of the Chinese government. The Chinese communist government wouldn’t take such things lightly, as it still believes it is the nation’s guide. However things play out, I feel BABA stock will continue to be impacted in the near term.
Delisting From the U.S. Stock Market
Another major threat to Alibaba is its potential delisting from the New York Stock Exchange. It comes amid the Trump administration’s suspicion that a suite of Chinese companies had military connections. U.S. citizens having shares in these blacklisted companies will have to sell their holdings within 60 days.
Earlier this month, the Wall Street Journal reported that officials might consider adding Tencent (OTCMKTS:TCEHY) and Alibaba to the list. Naturally, this has severe consequences for BABA stock and its investors.
However, at this point, nothing is for sure, especially how the government flip-flopped on its decision to delist Chinese Telcos. Regardless of whether or not the stock gets delisted, this will continue to impact its value in the near term.
Bottom Line on Alibaba
A dark cloud is hanging over Alibaba at this time. It faced a couple of threats that have fostered negative sentiment around BABA stock. It was all smooth sailing for the company until the authorities clamped down on its business.
The ultimate impact of its regulatory troubles will weigh in on this stock. Therefore, it’s best to wait and see how the situation develops with the company before placing your bets.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.