Alibaba (NYSE:BABA) stock initially rallied 9% following news of a $2.8 billion antitrust fine by China. Chinese regulators have made an example out of Alibaba after co-founder Jack Ma dared criticize the government in late 2020.
Alibaba has had regulatory uncertainty weighing down its stock for months now. While BABA stock isn’t out of the woods just yet, it appears its biggest regulatory risk is in the rear view mirror for now.
The BABA Stock Crackdown
Alibaba’s issues in China started back in November when Ma said Chinese banks operate with a “pawnshop mentality.”
It’s important for BABA stock investors to understand the power dynamics in play in China. Jack Ma is an entrepreneur with $49.3 billion in net worth, according to Forbes. Ma is both the co-founder of Alibaba and the founder of Ant Group. Ant is the digital payment affiliate of Alibaba, and Alibaba owns a 33% stake in Ant.
The Chinese banks that Ma criticized are state-owned. In China, the “state” is the Chinese Communist Party, or (CCP). Ma is a member of the CCP. Pretty much anyone wielding any power in China is also a member.
Yet somehow, Ma thought it was a good idea to publicly criticize CCP regulators just weeks prior to Ant’s highly anticipated IPO. At the time, analysts anticipated Ant’s IPO would be the largest in history.
I have no idea what Ma was thinking.
The CCP quickly announced brand new rules on micro-lending and then turned around and banned the Ant IPO when the company didn’t immediately comply with the new rules. To add insult to injury, the CCP also proposed a new set of antitrust regulations aimed at big Chinese tech companies and a new antitrust probe into Alibaba specifically.
Not a Worst-Case Scenario for Alibaba Stock
As a result of all this drama, BABA stock dropped from an all-time high of $319.32 back in October 2020 to around $223 prior to the antitrust fine. Alibaba’s underlying business is booming, but you’d never know it by looking at the stock’s price action.
At the time the antitrust probe was announced in December, BABA stock was trading at around $258. Sure, the $2.8 billion fine was significant, but it could have been much worse for Alibaba. The company generated nearly $150 billion in net income in 2020, so $2.8 billion is easily manageable. More importantly, Alibaba CEO Daniel Zhang said the antitrust rule changes China implemented will not have a material impact on the company’s finances moving forward.
In addition, Alibaba management said it is unaware of any ongoing antitrust investigations in China.
It seems at this point that the CCP has humiliated Alibaba and Jack Ma enough. They put Ma in his place, and the whole world was reminded of who is in charge in China. Hopefully, it’s now back to business as usual for Alibaba.
Business as Usual
Speaking of business as usual, Alibaba’s cloud services and e-commerce businesses are booming. In 2020, Alibaba reported 35.2% revenue growth and 70% net income growth.
Bank of America analyst Eddie Leung says the $2.8 billion fine reduced regulatory uncertainty for BABA stock. He’s still bullish on Alibaba due to its massive user base and long-term opportunities in cloud services, e-commerce and international expansion.
Leung says BABA stock investors should expect the company to ramp-up spending in the near term to maintain its favorable positioning.
“The company indicates an increase in investment, in the form of both expenses and foregone revenues, in features, value-added services, and user acquisition and retention to attract merchants. We expect prudent monetization in ad load and lowered tech service fees, for example,” Leung says.
Bank of America has a “buy” rating and $300 price target for BABA stock.
For now, the one remaining negative regulatory headline risk comes from the new accounting rules from the U.S. Securities and Exchange Commission that threaten to de-list Chinese companies that are controlled by the CCP. Alibaba is certainty controlled by the CCP. But I recently wrote about several good reasons why BABA stock is not at any real risk of being delisted.
How to Play It
U.S. regulators won’t delist BABA stock. China has finished punishing Jack Ma. Meanwhile, Alibaba’s business is booming, and it’s putting up growth numbers meeting or exceeding U.S. mega-cap tech stocks. Yet somehow BABA stock is priced like it’s a value stock, trading at only 21.1 times forward earnings.
Negative headlines come and go. Cloud services and e-commerce are massive growth trends that are here to stay. Once Ant Group is restructured to comply with China’s new requirements, I’m sure it will eventually go public. There are simply too many bullish catalysts ahead for investors not to own BABA stock.
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.