Stock Analysis & Ideas

Is the Surge in Alibaba Stock Warranted? Here’s What You Need to Know

Chinese stocks like e-commerce giant Alibaba (BABA) looked great to investors for quite a while. BABA had a massive market to pursue and at least some government support to help if things turned sour. Then, the very real potential of delisting emerged. That left overseas investors like those in the U.S. skittish about further investment.

However, recent developments gave Chinese stocks new life in trading on Monday thanks to a potential move that could defuse the risk. Specifically, China offered a proposal to U.S. regulators that would allow for access to most Chinese stocks’ auditing reports. The latest word noted that U.S. regulators would have access to “the majority of the 200-plus companies listed in New York” and that access would be available by the middle of this year.

Pinning Hopes on a Long Shot

Alibaba recovered substantially as a result of the Chinese proposal. It wasn’t the only one, either; JD.com (JD), Netease (NTES), and Tencent Music (TME) are all seeing gains today as a result of the proposal.

There’s a problem with such a perspective, however. If the proposal falls through, then so too does the recovery. If U.S. regulators decide for whatever reason that the proposal is unacceptable, then we’re right back where we started from.

The idea that regulators will allow any of their requirements to be blunted in any particular way is also something of a long shot. There may be some wiggle room, but it’s hard to imagine that regulators will settle for “most.”

Meanwhile, there are other points that could hamstring Alibaba that have little to do with the threat of delisting from U.S. exchanges. The biggest of these is a recession in China. Alibaba depends heavily on its market—Chinese citizens—having disposable income they can use to shop.

Food prices are spiking throughout China; indeed, throughout much of the world. Inflation was at a 41-year high just in March. Disposable income may be hard to come by going forward. It’s easy to see that most Chinese citizens won’t be interested in buying new furniture or the like when they’re paying more for food.

Meanwhile, even the U.S. is seeing signs of potential stagflation to come, according to investor Ray Dalio. Plus, with China shuttering parts of Shanghai in response to new potential COVID-19 threats, that’s going to hamstring supply chains still further and potentially leave Alibaba all dressed up with nothing to sell.

So even if regulators take the Chinese proposal for providing access to at least some records seriously, that’s still going to leave a lot of potential failure points in play for Alibaba.

Wall Street’s Take

Turning to Wall Street, Alibaba has a Strong Buy consensus rating. That’s based on 17 Buys and one Sell assigned in the past three months. The average Alibaba price target of $169.76 implies ~45% upside potential. Analyst price targets range from a low of $65 per share to a high of $235 per share.

Concluding Views

Granted, it’s not all disaster ahead for Alibaba. The company is off its lows for the year, but still well under its average price target.

Still, most of the Chinese companies listed on the U.S. exchanges tend to rely heavily on disposable income. That’s a commodity that may be in shorter supply than any part of the supply chain soon. That prospect, coupled with the still-real potential of delisting, leaves me quietly neutral on Alibaba, among others.

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