Alibaba (NYSE:BABA) stock is facing pressure on several fronts right now. Some of these threats are less severe than others.
While I believe that renewed delisting threats are a minor consideration, the bigger threats are in-country and much more powerful. As a result, BABA stock looks cheap right now, but it’s unlikely that a quick rebound is imminent.
I’m firmly with my InvestorPlace colleague Wayne Duggan in believing that a delisting of Alibaba by the New York Stock Exchange simply won’t happen.
He pointed to the idea that Alibaba isn’t as politically divisive as it is being made out to be. President Biden is working to reestablish Chinese ties so Chinese accounting standards are likely farther down the list of concerns.
His other points are that a delisting wouldn’t be easily implemented and that it would be costly. In the end, Alibaba is likely to acquiesce to some degree for the sake of business. These are all fair points.
A Closer Look at BABA Stock
I’d like to add two more points here about why delisting threats are overblown. First, a major exchange delisting doesn’t keep Alibaba from trading in the U.S. Delist BABA shares from the New York Stock Exchange and there goes a bunch of revenue from the exchange.
This revenue loss is of course amplified should Chinese companies be delisted at large from the Nasdaq and NYSE en masse.
The rhetoric might inspire some, but the reality of losing money will inspire far fewer to follow through. The truth is, in the unlikely case that Chinese companies are delisted en masse, they can list through over-the-counter markets. So, from a practical perspective, there’s little incentive for the move to actually transpire.
Second, the rationale for such audits is exaggerated. Certainly, there are bad apples among Chinese companies. Companies like Luckin Coffee (OTCMKTS:LKNCY) that flout ethical business practices in serious ways rightly deserve to be punished.
On the other hand, massive companies like Alibaba are much less likely to be running afoul of ethical standards on a vast scale. I agree that audits are necessary, but I believe that Chinese businesses are just about as likely to be on the up and up as businesses anywhere else.
There’s a bigger, ongoing issue that is more relevant: the Chinese government is cracking down on Alibaba over concerns of anti-competitive behavior by the firm.
Since late last year, the CCP has continued to come down on Alibaba and the company’s financial affiliate, Ant Group.
Alibaba now faces fines exceeding $975 million stemming from anti-competition allegations. One such example is a practice in which merchants selling on both Alibaba and JD.com (NASDAQ:JD) had to choose one or the other.
The company faces pressure to step in line with political agendas after founder Jack Ma criticized elements of the Chinese system. Alibaba was treated with preference by the Chinese government, but that looks to be a thing of the past.
Further, Alibaba faces problems that extend beyond the allegations of anti-competitive behavior. China doesn’t want to harm its homegrown ecommerce success story, nor does it want to alienate it from international and domestic investors.
These issues weigh more heavily on BABA share prices than U.S. exchange delisting fears.
The truth is that all of this commotion opens up opportunities for companies like JD.com (which already has greater revenues than Alibaba) and Pinduoduo (NASDAQ:PDD) to gain market share on Alibaba.
While JD.com and Pinduoduo’s respective market capitalizations of $132 billion and $176 billion make them much smaller, they are gaining. Alibaba now carries a market cap of $630 billion, down $165 billion in Q4 of 2020.
Alibaba made nearly $72 billion in 2020 revenue. Analysts expect that revenues will grow 39% this year. Pinduoduo made $9.118 billion, JD.com, $114.3 billion.
Beyond its hiccups in the U.S., Alibaba faces major issues from its own government and from competitors domestically. The delisting issues are relatively minor and more of a side note. I believe Alibaba is not worth buying at this moment.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.