To understand why I’m very cautious on Alibaba (NYSE:BABA) stock, it’s vital to understand and internalize an important point about the Chinese government.
The country’s rulers will pretty much do whatever they want to any company, whenever they want to do so.
They can decide to badly cripple any firm with little or no warning.
Investing in companies that the ruling Chinese Communist Party doesn’t like is extremely risky.
Moreover, it’s pretty clear that the party, for now, is not a big fan of Alibaba, making BABA stock very dangerous.
Beijing Has a Grudge Against Alibaba
In recent months, China’s government has taken a series of actions against Alibaba. Cumulatively, these moves show that the ruling Chinese Communist Party does indeed have a problem with the e-commerce giant.
Most notably, on April 10, Beijing fined Alibaba a huge $2.75 billion for allegedly violating anti-monopoly rules and abusing its dominant market position.
Also in April, the government forced a large subsidiary of Alibaba, Ant Group, to restructure itself. In November, Beijing derailed a planned $37 billion IPO by Ant Financial.
What’s more, in November 2020, Jack Ma, Alibaba’s founder and former longtime CEO, suddenly and mysteriously vanished for three months.
All of these incidents came in the wake of a speech by Ma in which he criticized the Chinese financial system saying that the nation’s banks had a pawn-shop mentality and suggesting that Beijing was using antiquated methods to regulate digital financial companies.
It’s reasonable to surmise that the crackdown sparked by Ma’s speech and could continue for some time.
The Push Against VIEs Could Also Hurt Alibaba
Since the turn of the century, Chinese companies, including Alibaba, have used variable interest entities, or VIEs, to list shares in the U.S. without obtaining permission from Beijing.
VIEs are “shell companies” set up by Chinese firms. By buying shares in these entities, investors obtain a similar status as shareholders in the Chinese firms themselves, even though they do not actually own shares in those companies.
Beijing has never formally approved the practice, but until recently it took no significant actions against companies that had set up VIEs.
Additionally, Beijing plans to examine the intentions of all Chinese companies that are seeking to launch IPOs abroad, force such companies to obtain permission from the government for their IPOs and, most ominously for Alibaba, more forcefully regulate all Chinese companies with shares listed in foreign countries.
The evidence suggests that Ma’s speech caused China’s leadership to start fearing the growing strength of the country’s large tech companies, especially those with shares listed in foreign countries.
Since Ma put Alibaba at the eye of this storm, there’s a good chance that Beijing will take further, major actions against the e-commerce giant, harming BABA stock in the process.
The Bottom Line on BABA Stock
Short Hill Capital’s Managing Partner, Steve Weiss, said that in the wake of Beijing’s sudden, harsh action against Didi, he would never again own Chinese stocks.
I think that’s an overreaction, but I do believe that investors should only own shares of Chinese companies that Beijing has shown concrete signs of supporting.
I certainly believe that the stocks of Chinese companies that have fallen out of favor with Beijing should be avoided.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.