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U.S. Probes Alibaba Cloud Unit for National Security

Chinese tech giant Alibaba Group Holdings Ltd. (BABA) is under scrutiny due to rising concerns of potential threats to the U.S. national security from its cloud business, according to Reuters. Following the news, shares fell 5.1% briefly and ended the day down 2.3% at $128.60 on January 18.

Alibaba offers e-commerce, retail, internet, and technology services. BABA stock has lost 51.6% over the past year due to regulatory crackdowns from Chinese government on its tech companies.

Alibaba Cloud, A National Threat?

The Biden administration is reportedly probing Alibaba’s cloud unit to check how it stores U.S. customers’ data, specifically personal information and intellectual property. The authorities are worried about the potential threat to the nation’s security should Chinese government gain access to the data.

According to a Gartner Inc. (IT) study, BABA’s cloud business is relatively small with only about $50 million in annual revenue. It faces stiff competition from U.S. cloud service providers such as (AMZN), Microsoft Corp. (MSFT), and Alphabet Inc. Class A (GOOGL).

Two of the world’s technologically advanced economies have been at war on several issues including the stringent norms for China-based U.S.-listed tech companies.

If the U.S. authorities find any concerning insights from the probe, it could lead to the barring of American customers and businesses from doing any business with BABA’s Cloud services. This could potentially disrupt the tech giant’s future growth trajectory in the U.S as several analysts believe the business is currently undervalued.

Alibaba had given similar warning to its shareholders in its 2021 annual report stating, “U.S. entities and individuals with whom we have existing contractual or other relationships may be prohibited from continuing to do business with us, including performing their obligations under agreements involving our supply chain, logistics, software development, Cloud services and other products and services.”

Analysts’ Take

Following the news, Goldman Sachs analyst Piyush Mubayi lowered the price target on the stock to $197 (53.2% upside potential) from $215, while maintaining a Buy rating.   

Mubayi expects Q3FY22 revenue to slow down by 10% and forecasts lower revenue for full year fiscal 2022, 2023 and 2024 due to lower revenue from China retail and cloud units.

Overall, the stock has a Strong Buy consensus rating based on 21 Buys and 3 Holds. The average Alibaba price target of $193.89 implies 50.8% upside potential to current levels.

Hedge Fund Activity

According to TipRanks’ Hedge Fund Trading Activity tool, confidence in Alibaba, one of the best Chinese stocks, is currently Negative. In all, 47 hedge funds decreased their cumulative holdings of the BABA stock by 1.1 million shares in the last quarter.

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