If Anything Can Survive the China Security Crackdown, It’s Alibaba
There’s no denying that Alibaba (NYSE:BABA) is still an e-commerce giant in China. Yet, at the same time, the current market sentiment isn’t particularly positive towards BABA stock.
This is typical in the financial markets. A perfectly good company can be a darling one year, and then hated the next year.
Informed investors should be able to recognize the difference between a business that’s actually in trouble and one that’s unloved for the moment but should be fine in the long run.
Personally, I would place Alibaba in the latter category. Nonetheless, it’s important to understand why there’s negative pressure on the share price, and how far the eventual rebound could go.
A Closer Look at BABA Stock
Prior to October 2020, BABA stock was typically either in an uptrend or just going sideways.
Sometimes the stock tested investors’ patience, but it didn’t crash. Even the onset of the Covid-19 pandemic didn’t seem to induce a prolonged downturn.
BABA stock topped out at around $320 on Oct. 27, 2020, before embarking on a multi-month decline. By July 8, the stock actually touched $200.
The situation seemed a little bit less bleak in mid-July as the share price stayed above the key $200 level. Nevertheless, the overall downtrend was unsettling.
There’s a big silver lining here, though. BABA stock’s trailing 12-month price-earnings ratio is 25.3, which is quite reasonable for an e-commerce company.
In other words, there’s a bargain here that’s ripe for the picking.
But again, we should want to know whether the share price slide is due to an actual problem with the company – which, as far as I can tell, isn’t the case at all.
Shifting the Focus
Admittedly, there has been tension between Alibaba and the Chinese government.
In late 2020, while Chinese fintech firm Ant Group (which was founded by Alibaba co-founder Jack Ma) was preparing its initial public offering, Ma said that in China, banks still operate with a strong “pawnshop” mentality. (These are largely state-owned banks, by the way.)
Ma disappeared but then reappeared in January, evidently alive and healthy.
Chinese authorities had pulled the plug on the Ant Group IPO in Ma’s absence, while reports surfaced of a sweeping anti-monopoly probe in China, with Alibaba being a potential target.
That probe hasn’t seemed to inhibit Alibaba’s business, so far. Moreover, the focus of the crackdown appears to have shifted away from monopolistic practices.
In a disturbing twist, the Cyberspace Administration of China stated that it has responded to the proliferation of obscene images and videos.
And the watchdog group did this by fining and/or warning several Chinese technology firms, including Alibaba.
This Will Pass
Something tells me that Chinese regulators might be less interested in clearing the nation of inappropriate content, and more interested in posturing and flexing its muscles.
To put it another way, I’m taking a “this, too, shall pass” attitude towards Beijing’s fine and/or warning against Alibaba.
The other primary focus of the Chinese government’s war path nowadays seems to be cybersecurity.
Notably, Chinese regulators have targeted ride-hailing company Didi Global (NYSE:DIDI) for a cybersecurity review.
Again, the accusation comes from the Cyberspace Administration of China, which is alleging that Didi illegally collected its users’ data.
Don’t get me wrong. I’m not against regulators taking action against the proliferation of inappropriate images and videos, or addressing cybersecurity concerns. However, there’s a tendency for these crackdowns to run their course and for the strongest companies – including Alibaba – to come out intact, if not unscathed.
The Bottom Line
When other traders dump their stock shares due to excessive fear and worry, that’s where opportunities arise.
Today, BABA stock is trading at a low valuation even though the company isn’t in any real trouble.
Sure, Chinese regulators will flex and posture, but that’s just what they do.
Chances are, they’ll impose their fines and move on. -And that’s when the market will suddenly love Alibaba again.
On the date of publication, David Moadel 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.
