Why Alibaba, JD.com, and Pinduoduo Shares Surged Higher Today

What happened

Shares of Chinese e-commerce stocks rose sharply on Monday, with Alibaba Holding Group (NYSE: BABA) up 7%, JD.com (NASDAQ: JD) up 7.3%, and Pinduo-duo (NASDAQ:PDD) up 7%, at 1:40 a.m. ET.

These shares rose not on news relating to them specifically, but rather on news relating to other Chinese stocks listed in the United States, as regulators in China indicated that they would end their regulatory crackdowns on d other Internet companies. This bodes well for these three large-cap Chinese internet companies that have been targeted by regulators and are listed in the United States.

So what

This morning, The Wall Street Journal reported that the Chinese authorities had informed Didi Global (NYSE:DIDI) they would lift the ban on new users and reinstate Didi’s app on national app stores, after it was removed nearly a year ago. Didi should pay a big fine.

Authorities also said they would conclude similar investigations into the logistics hub. Complete Truck Alliance (NYSE:YMM) and online recruitment platform Kanzhun (NASDAQ:BZ).

While these investigations do not directly relate to the three aforementioned e-commerce stocks, the developments bode well for any Chinese internet company that collects large volumes of user data and is listed on US stock exchanges. In fact, the regulatory assault on Chinese tech companies started with Alibaba, after founder Jack Ma criticized the government’s approach to the fintech sector in October 2020.

Since then, Chinese tech giants have faced endless regulatory crackdowns on their businesses, involving the breaking of monopolies and duopolies, limits on consumption of things like video games, better pay for drivers- couriers, price controls and (of course) big fines. There is also talk of the Chinese government taking a 1% stake in Didi and other tech companies, and assuming direct oversight of business decisions.

For its part, Alibaba subsequently saw the IPO of its fintech arm Ant Financial delayed to the end of 2020, and the underlying company Ant Financial was dissolved in 2021. Alibaba also had to terminate some exclusivity practices for its suppliers, essentially giving competitors a more level playing field.

However, China’s economy has since deteriorated after its housing bubble burst last summer, and the government recently imposed shutdowns in Shanghai as part of its tough zero-COVID policy in response to a recent epidemic. Declining growth and job losses appear to have led regulators to change course, loosen regulations and shift to supporting the tech sector, rather than restricting it.

Additionally, Shanghai finally officially emerged from its two-month lockdown last week. The combination of the end of the regulatory campaign and the lockdowns was enough to send shares of these downed Chinese stocks soaring.

A person receives a package from a delivery person.

Image source: Getty Images.

Now what

Despite today’s nice gains, Alibaba, JD.com and Pinduoduo are all still way off their highs. So, are Chinese tech stocks a buy at their markdowns?

This is still a tricky question. While the government’s adversarial posture may be coming to an end, the two-year campaign has certainly reset things in the tech world. I wouldn’t expect these companies to return to pre-2021 growth anytime soon.

Alibaba’s growth slowed to just 9% last quarter, with its core high-margin “customer management” part of its e-commerce platform posting flat results from a year earlier. That’s why adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) actually fell 30% from a year earlier.

Pinduoduo’s revenue growth was only 7% last quarter, after recording a 239% increase in the year-ago quarter, as the company focused on profit, not growth at all costs.

JD.com was more stable, but decelerated to 18% growth last quarter, from 39% a year ago.

Therefore, it could be some time before these companies reach new heights. Moreover, the Chinese government’s actions on the international stage, particularly its alliance with Russia, have also called into question the risks for US investors who hold Chinese stocks. There are lingering delisting concerns, trade and tariff concerns, and geopolitical issues that won’t go away.

This does not mean that these companies are not worth an investment, far from it. However, investors are likely to discount these companies’ earnings and growth expectations by more than US equities, given the higher uncertainty surrounding Chinese equities today. You should also pay attention to your exposure to China in your portfolio.

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Billy Duberstein has no position in the stocks mentioned. Its clients may hold shares of the companies mentioned. The Motley Fool fills positions and recommends JD.com. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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