Amid heightening stock market fears, investors are circling back to Alibaba’s (NYSE:BABA) issues. The Securities and Exchange Commission’s threats to delist Chinese companies returned last week.
Last month, China reassured investors by ordering domestic firms to open their financials to auditors. That created the biggest one-day rally in BABA stock and others. That included Pinduoduo (NASDAQ:PDD), Baidu (NASDAQ:BIDU) and JD.com (NASDAQ:JD). Since that mid-March rally, those stocks have faded. More recently, worries about Didi (NYSE:DIDI) surfaced.
Bloomberg recently reported that Didi’s fate is unclear in the American stock market. On top of that, Didi is also the target of more regulatory sanctions from the Chinese government. The Cyberspace Administration of China wants revisions that will further hurt Didi. China’s tough stance against the ride-hailing firm spooked Alibaba investors.
Brave investors might brush off the unrelated developments, but doing so would be foolish. If China has a willingness to steepen its punishment against Didi, chances raise it’ll set its sights again on Alibaba. Over a year ago, Chinese regulators abruptly canceled a would-be record-breaking $37 billion initial public offering of Alibaba’s Ant Group.
Cautious investors should play it safe with Alibaba. Wait for China to permit the e-commerce firm to sell its fintech division. When that happens, it will unlock the steep discount on Alibaba shares. The stock trades at a paltry forward price-to-earnings ratio of under two times. This is a valuation multiple never thought possible. Yet, the market’s discount on Alibaba is justified. The regulatory headwinds in China are getting worse. China extended its Shanghai lockdown to the entire city earlier this month with no set end date. The government is prioritizing setting Covid infection rates to zero over the health of the economy.
China’s willingness to sacrifice its economy to win back its title of low infection rates and mortality should scare Alibaba investors. E-commerce sales are already declining. On top of that, Alibaba faces tougher competition from JD.com and other online retailers. In addition, it cannot export goods to foreign buyers in meaningful volumes. The Shanghai lockdown has drastically damaged Alibaba’s business momentum. This is a major issue that will hamper the stock’s recovery. Continue avoiding BABA shares until those uncertainties clear.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.