Shares of Chinese e-commerce giant Alibaba (BABA) – Get Alibaba Group Holding Limited American Depositary Shares representing eight reports each climbed 36% on March 16 after financial authorities announced they were working on a plan to cooperate with US regulators. The aim of the plan is to prevent Alibaba and other China-based companies from pulling out of US exchanges.
Until now, regulatory hurdles were the main hurdles keeping investors away from Chinese companies. With its threat of delisting lifted, is Alibaba’s stock ready to rebound?
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Why is China relaxing its regulatory crackdown?
News that Chinese government officials are rethinking their tough regulatory policies for companies listed on US stock exchanges gave Chinese stocks their best trading day in 14 years. The iShares MSCI China ETF (MCHI) – Get the iShares MSCI China ETF reportone of the main indices tracking Chinese companies, rose more than 20% on Wednesday, and stocks like Alibaba and Nio (NIO) – Obtain NIO Inc. US Custodian Shares each representing Class A ratio 蔚来汽车 closed the day up more than 36% and 25%, respectively.
By working on a cooperative plan with their US counterparts, Chinese regulators can bolster the stability of Chinese stocks and prevent China from being deemed uninvestable.
But at the same time, China is reporting its biggest COVID outbreaks since the pandemic began. Thanks to the country’s zero COVID policy, this is forcing many cities into lockdown. This could have a very bad impact on the global economy – and particularly on China’s GDP.
Economists now expect China’s GDP to take a big hit in the first quarter. So it may not be a coincidence that the Chinese authorities have decided to ease regulatory pressures at this time. After all, it would not be ideal to jeopardize the flow of foreign capital.
Alibaba’s fundamentals remain strong
Alibaba has faced tough competition over the past year due to weaker e-commerce sales in 2021 than in 2020. However, Alibaba’s business remains robust.
The company has an aggressive growth plan for the next few years and has nearly half a trillion dollars to allocate primarily to its emerging segments such as cloud computing and storage, as well as digital media and entertainment.
Moreover, when looking at Alibaba shares, the company is trading at a rather modest valuation multiple compared to its peers. Obviously, this is the result of the sell-off we saw in 2021. Alibaba’s market capitalization has lost over $500 billion since October 2020.
Alibaba is currently trading at a price-to-earnings (P/E) ratio of 12.2x. This is significantly lower than its rivals. Amazon (AMZN) – Get the report from Amazon.com Inc. is currently trading at a P/E of 47 times, and JD.com (J.D.) – Get the report from JD.com Inc. trades at 38 times.
Is Alibaba ready to join?
Regulatory concerns and tough competitions have driven the story of Alibaba’s actions. But despite all the decline that Chinese stocks have faced, the Wall Street consensus has continued to be bullish on BABA. This is based on the fact that the stock’s decline was primarily due to factors beyond the company’s control and not based on its strong fundamentals.
And in the short term, Alibaba could even benefit from China’s new lockdowns. With its core audience staying at home, we could see a repeat of 2020’s e-commerce trends.
(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)