Alibaba Delisting Fears Provide Yet Another Buying Opportunity

Last week, Alibaba (NYSE:BABA) shares once again took a hit on renewed fears the stock will be delisted in the U.S. The U.S. Securities and Exchange Commission said it has begun implementing new auditing standards of foreign companies, a move that some investors fear could ultimately lead to BABA stock being delisted from the NYSE.

Alibaba Stock
Source: Nopparat Khokthong / Shutterstock.com

Incredibly, this is at least the third time BABA stock has dropped on the same news in the past year. I wrote back in May 2020 when the Holding Foreign Companies Accountable Act was first proposed that Alibaba investors shouldn’t sweat delisting.

There are at least three reasons why BABA stock won’t be delisted. These headline-related selloffs have and will continue to be buying opportunities.

Politicians Don’t Care About BABA Stock

All Americans should know at this point that politicians of both major parties don’t care about actually getting things done. They care about winning elections and they care about public opinion.

Former President Donald Trump started a trade war with China and made it a centerpiece of his campaign. In his re-election year last year, Trump took advantage of negative U.S. public opinion of China following the novel coronavirus pandemic. Cracking down on U.S.-listed Chinese stocks was one way to appear tough on China to U.S. voters.

Of course, Trump lost the November election. However, his successor Joe Biden is now in a difficult situation of trying to rebuild the U.S. relationship with China without appearing “soft.”

Personally, I don’t think Trump or Biden cares much about protecting U.S. investors from Chinese accounting. I believe Trump wanted to appear tough on China and Biden wants to appear “not soft” on China. Both of them just want to win elections. I believe this U.S. regulatory crackdown is just the latest example of politicians and regulators talking a big game and having a small impact.

Delisting Wouldn’t Be Easy

Even if regulators actually attempt to enforce the new accounting regulations, that enforcement may be more difficult than it seems.

The new regulations force U.S.-listed companies like Alibaba to prove they are not “owned or controlled by a foreign government.” That one shouldn’t be difficult for Alibaba to prove. Any BABA stock investor knows the company is in the dog house of the Chinese Communist Party these days. If the CCP called all the shots at Alibaba, there would be no need for its own internal “crackdown” on the company.

In addition, new U.S. regulations specify Chinese companies would be delisted if their auditors aren’t certified by the Public Company Accounting Oversight Board after three consecutive years of inspection.

This rule comes with its own sets of enforcement difficulties. Americans actually own shares of Alibaba Group Holding Corp, not Alibaba itself. Alibaba stock represents shares of a variable interest entity (VIE) that is headquartered in the Cayman Islands, not China. So the VIE is listed in the U.S., not Alibaba itself. In other words, it may be extremely difficult for U.S regulators to gain access to Alibaba’s actual books. Meanwhile, I’m sure BABA stock accounting is clean as a whistle.

Finally, Alibaba launched a dual listing in Hong Kong in 2019. If U.S. regulators ultimately move to delist Alibaba stock, it won’t happen overnight. Investors may be able to simply transfer their shares to a U.S. broker that allows trading in Hong Kong and convert their investment to Hong Kong shares. U.S. investors may also receive cash for their shares at a valuation supported by the Hong Kong valuation.

Alibaba May Comply

The most likely outcome is almost always the simplest one. Alibaba stands behind its accounting. And its company is booming. It reported 36.9% revenue growth and 52.4% net income growth in the most recent quarter. I’m confident Alibaba management will do everything it can to work with both the CCP and U.S. regulators to keep the peace so it can continue to grow and profit.

China doesn’t want to tear down its own home-grown tech giants in front of the rest of the world. U.S. politicians and regulators don’t want to risk alienating Chinese companies looking to list in the U.S. It would potentially cost Wall Street billions and billions of dollars.

BABA stock isn’t going anywhere. The U.S., China and Alibaba itself all have too much to lose from an exit from the U.S. markets. Long-term investors should trust in the company’s growth story. They should also trust that the status quo is the best path forward for all parties involved.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2021/04/baba-stock-alibaba-delisting-fears-another-buying-opportunity/.

©2021 InvestorPlace Media, LLC