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Chinese Authorities Hand Alibaba a Win; Now What?
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Chinese Authorities Hand Alibaba a Win; Now What?

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Alibaba, and its parent company Ant Group, got a big win from the Chinese government, but has Alibaba just traded one problem for another?

Chinese e-retailers like Alibaba (BABA) have had a rough time of things lately, mostly due to interference by the Chinese government. The threat of delisting from U.S. stock exchanges didn’t help matters either.

However, Alibaba shot up 9.2% in the premarket on Friday due to one big new win handed down from that same Chinese government. Those gains did not manage to hold going into the trading session, as the stock is currently up only 1%.

Are the threats Chinese e-commerce operations facing coming to an end, and is it time for investors to consider buying in? I, meanwhile, am willing to acknowledge the possibility that this is the start of something great in Chinese stocks.

I’m therefore shifting my position from bearish to neutral. It’s too early to start celebrating and buying yet because even as one problem is fading from view, a whole new problem is about to start up.

Alibaba has not had a great year so far. Alibaba spent the latter half of June 2021 into July above the $200 per share level. After a series of drops and a few recoveries, the company is now valued at less than half of what it was back at its highs of 12 months ago.

Meanwhile, the news that managed to shift my position around was a surprisingly big win. The Chinese central bank approved an application from Alibaba’s parent company, Ant Group, to form a financial holding company. Such a move would allow Ant Group to seek an initial public offering after the company is established.

Wall Street’s Take

Turning to Wall Street, Alibaba has a Strong Buy consensus rating. That’s based on 17 Buys and two Holds assigned in the past three months. The average Alibaba price target of $159.84 implies 55.7% upside potential.

Analyst price targets range from a low of $115 per share to a high of $276 per share.

Investor Sentiment Shows That Some are Willing to Take Risks

Analysts are clearly heavily in on Alibaba. The TipRanks Smart Score seems to assent. Right now, Alibaba has a Smart Score of 9 out of 10, the second-highest level of “outperform.” Most investor sentiment metrics aren’t so clearly approving. However, they aren’t exactly unhappy either.

Hedge fund involvement, as measured by the TipRanks 13-F Tracker, is one clear sign. Hedge funds increased their involvement with Alibaba by adding 1.1 million shares in the last quarter. That’s not a huge gain percentage-wise—hedge funds have owned between 83 and 86 million shares since June 2021—but it is objectively substantial.

Meanwhile, insider trading at Alibaba is something of a blank slate. No data is currently available for insider trading at Alibaba, so no conclusions can be gathered about what those trades might mean.

Retail investors—at least those who hold portfolios on TipRanks—are a different story. TipRanks portfolios holding Alibaba shares slipped 0.1% in the last seven days but are up 0.7% over the last 30 days. Meanwhile, Alibaba’s dividend history, or lack thereof, demonstrates a better focus on growth.

Trading One Problem for Another?

Granted, this isn’t the first time that we’ve heard about Ant Group potentially getting a shot at an IPO. The earlier reports from Bloomberg were quickly addressed by the China Securities Regulatory Commission, which made it clear that no such review and research work was going on.

So for right now, it may be a good idea to give this news a couple of days to settle in and potentially be refuted later. If no such rebuttal emerges, then that could be good news for Alibaba and for other U.S.-listed Chinese stocks as a whole.

One of the biggest problems facing those stocks was potential crackdowns from the Chinese government. Chinese tech stocks had been battered extensively by such policy matters earlier this year. If the Chinese government starts to relent, then the threat of further crackdown may be off the table. That’s certainly good news for all Chinese stocks trading on U.S. exchanges.

However, this comes at a comparatively bad time. All those Chinese e-commerce operations are now about to face much more hazardous economic conditions.

The likely upcoming recession is going to limit not only customers’ interest in their products but also investors’ ability to get in on the action. Granted, the fallout will hit retailers worldwide, but China will not be exempt, with consumers increasingly hesitant about making purchases and signs emerging that there’s about to be a glut of goods available in stores as port congestion alleviates.

Indeed, U.S. seaports are already looking for an earlier peak season. Retailers are seeing explosive surpluses in available merchandise—around $45 billion in surplus by some reports—and that’s going to drive prices down.

Throw in a gun-shy consumer who’s filling up a gas tank at $5 or more per gallon and spending more than ever at the grocery store. That adds up to businesses selling huge volumes of surplus goods at pennies on the dollar.

Some might instead call this the “worst-case scenario for retail, or close to it.” That’s not good news for any online retailer, no matter what country they’re operating within.

Concluding Views

If the reports about Ant Group and its potential IPO hold true, this is good news for Alibaba. Don’t let anyone dissuade you from that. However, behind this pristine sliver of good news is a morass of bad news likely to swallow it whole.

Will it help insulate Alibaba from some of the worst of the bad news? Quite possibly. After all, Ant Group drawing investors will likely mean some benefit for Alibaba as well. It’s better news if the Chinese government manages to continue being not hostile to Alibaba and others like it.

However, there are so many gray areas and potential disasters around Alibaba that recommending it would likely be a mistake. It does bear watching, however. Alibaba is currently trading below its lowest price targets and just off its lows for 2022. That may make it a good Buy for down the road.

Those who Buy now may see their investment reduced in value in the near term. Yet, there’s no doubt that buying in at these comparatively-low prices may poise investors for explosive gains later, especially after consumers get their confidence back.

The odds of losing ground here are strong, but there’s generally a morning after, so to speak. It may be a solid strategy to Buy now in anticipation of that recovery. That sheer level of uncertainty is why I’m neutral on Alibaba.

Disclosure

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