A Lot of Drama at Alibaba

This morning, Alibaba (BABA) reported earnings before the bell.

If you haven’t been following the Chinese technology stock, it has faced an incredible amount of pressure.

In October, the Chinese e-commerce giant’s stock traded just shy of $320.

Last week, it fell below $180 per share for the first time since the 2020 COVID-19 market crash. Today, I want to discuss recent events at the ninth-largest company by market capitalization trading on the U.S. stock market.

Then, I’ll tell you if and when this company will become a “Buy.”

The “Do It All” Tech Company

There has been considerable interest among investors when it comes to China. The world’s second-largest economy continues to grow at a breakneck pace. Its population sits north of 1.5 billion people, and its middle class has expanded in recent decades.

As such growth continues, there’s an easy comparison that some investors like to make when it comes to buying Chinese tech firms.

They’re looking for the Chinese version of Apple. Or the Chinese version of Microsoft.

When it comes to Alibaba, the company is considered the Amazon of China. Today, the company has a valuation north of $500 billion and maintains the sixth-largest global brand valuation.

Alibaba has a robust e-commerce and retail platform that handles sales among buyers and sellers in 240 countries. It has a massive artificial intelligence division and maintains an Alibaba Cloud business to manage its e-commerce ecosystem. It also invests billions of dollars into startups through its venture capital firm.

If there were ever a company that could touch Amazon’s reach, Alibaba would be it.

Alibaba does have one major edge over Amazon. Each year, Amazon hosts its 48-hour Prime Day event. It’s a massive shopping event that generated $11.19 billion in June 2021.

In China, a similar shopping holiday is called Singles’ Day on Nov 11. The 11-day shopping event leading up to Singles’ Day in 2020 generated $74.1 billion in revenue.

Regulators Pounce

Despite all of Alibaba’s success and growth potential, the sharp sell-off has less to do with its operations and more to do with its government.

China remains a communist country, and its political leaders don’t like competition regarding population influence. Starting in October, Chinese regulators began a series of regulatory crackdowns on their entire technology sector. We’ve witnessed a dramatic crackdown over concerns related to personal security and data privacy. We’ve seen Beijing enact rules that eliminate for-profit tutoring, a move that forces some companies to become nonprofits.

Shares of education stocks Gaotu Techedu (GOTU), TAL Education Group (TAL), and New Oriental Education & Technology Group (EDU) are all off more than 80% from their 52-week highs.

Recently, Chinese ridesharing giant DiDi Global (the Uber of China) went public on the New York Stock Exchange. Just days after the IPO, Chinese officials mandated an end to all new registrations for the company’s app. The news sank shares of DiDi, which surpassed $18 after the IPO but soon fell to as little as $7.16 after the crackdown. The app has been removed from digital stores, and DiDi could face “unprecedented penalties,” according to Bloomberg.

Chinese officials are reining in their companies’ ability to raise capital in foreign markets. They’re citing worries about data, cybersecurity, and personal privacy. But it’s unclear if this is a larger effort to consolidate power around the nation’s most influential companies.

It’s also worth noting that Chinese officials forced the cancellation of the highly anticipated IPO from Ant Group, a massive financial technology firm backed by Alibaba.

Alibaba also faced a $2.75 billion fine over “anti-monopoly” rules and security concerns. In addition, it might have to give up control of its customer data to the Chinese Communist Party for “social scoring” — a system imposed by the government that rates every Chinese citizen for their social and economic reputation. The Social Credit System is more or less a blacklist that can cut people off from various perks like air travel and the internet if they are deemed “untrustworthy.”

What’s Next for Alibaba

While Alibaba has faced remarkable scrutiny, it’s unclear just how much further China can go before it starts to affect both investor confidence and its broader consumer economy. Alibaba is a highly important company to China, given its massive reach, supply chain success, and broad consumer platforms. It does not appear that China wants to blow up or nationalize the company.

It simply wants to cull the company’s influence. Some analysts have said that China is paranoid about its technology companies gaining similar influence over its nation. The analysts say that the influence of Facebook, Amazon, and Apple in the U.S. is the reason for the increased scrutiny and regulatory moves. The CCP doesn’t want “social” competition.

It also doesn’t want any financial competition. Keep in mind that China has introduced the “digital yuan,” a signal that the government wants greater control of the nation’s financial ecosystem. This could dramatically impact Alipay as the Chinese government looks to grow its market share on payment solution platforms.

With this in mind, Alibaba remains a stock to watch due to its incredible reach and size. But again, we’re talking about one of the top 10 largest companies trading on the NYSE by market capitalization. Regardless of today’s earnings report, the stock is too risky to trade right now.

Shares of Alibaba have been in the Red Zone on TradeSmith Finance for seven months. It has also been locked in downtrend momentum for two months and maintains a Bearish rating from social sentiment platform LikeFolio.

Don’t speculate on this company right now. Instead, let’s wait to see if momentum does return to the stock in the weeks or months ahead. When Alibaba moves into the Green Zone, I’ll alert you right here in TradeSmith Daily.