The past two months have been quite an eye-opening journey for Chinese e-commerce giant Alibaba Holdings (NYSE :). After hitting a record high of $ 319.28 per share in late October, its shares have lost more than a quarter of their value.
And there are signs that the worst is not over for the company co-founded by legendary entrepreneur Jack Ma. The first sell-off of BABA shares began in November after Chinese authorities cracked down on Ma & # 39; s sprawling Internet empire by blocking the $ 35 billion IPO by Ant Group financial arm.
Regulators mandated Ant, in which Alibaba has a 33% stake, to prepare a recertification plan and implement a timetable for the review of its businesses, including its credit, insurance and asset management services.
The move set in motion a series of regulatory decrees that threaten to reshape the landscape for Chinese online operators, including new anti-monopoly rules, which provide a framework for curbing anti-competitive behavior, such as colluding over the sharing of sensitive consumer data, alliances squeeze out smaller rivals and subsidize below cost services to take out competitors.
These regulatory measures, if approved, could significantly weaken Alibaba and other Chinese Internet operators and change their business models. Last month, China's main trade regulator said it is investigating whether Alibaba has abused its dominant market position in online retail through activities such as allowing merchants to sell products exclusively on its platforms.
In the Chinese context, however, the problem is that it is difficult to figure out what lies behind these regulatory measures: is it just a regulator trying to resolve market imbalances? Or is the motive political?
Politics or Regulations?
Ma & # 39; s current troubles began shortly after he infuriated China & # 39; s leadership by criticizing financial regulations and quoting a line from Chinese President Xi Jinping in a controversial speech, according to the Wall Street Journal.
This complex situation makes it difficult for investors to take advantage of BABA's weak stock price, which some analysts believe is up for grabs due to the company's immense growth from online shopping and booming cloud activities.
Baird analyst Colin Sebastian, while lowering BABA & # 39; s price target from $ 285 from $ 325 in a recent note, said it is "very difficult to predict the outcome" of the study.
It "is unlikely to result in significant changes in the core business of the company," but stricter regulations "could open the door for competitors, including smaller regional players, to gain market share," Sebastian said. That could put a small dent in Alibaba's growth, but won't have a major impact.
KeyBanc Capital Markets, on the other hand, said the stock's recent weakness has generated a juicy buying opportunity by assigning the stock an overweight rating with a price target of $ 355.
In addition to the Chinese regulatory action, BABA could also be the main target of the US-China trade war, further weakening the appeal of its investments. Yesterday, the media reported that the outgoing Trump administration is considering blocking investments in Alibaba and Tencent Holdings (OTC :).
According to a report by the Wall Street Journal, the State Department, the Department of Defense and the Treasury Department are among the authorities involved in the deliberations. Imposing a ban on the two companies would be the most dramatic escalation to date by President Donald Trump's administration in a trade dispute, given the sheer size of the two companies and the difficulty in settling positions, the report said.
Bottom Line
A 25% dip in BABA stocks makes it an attractive bet, especially for those with a long-term investment horizon and higher risk appetite. That said, it's hard to predict how much damage these headwinds will cause to the internet giant in the short term. We believe there is a risk of more downside and that sidelines will give investors a better entry point.
