Emily McCormick of Yahoo Finance looks at how Alibaba is doing on Thursday.
Video transcription
JULIE HYMAN: We want to talk about Alibaba this morning because those stocks are much lower in the pre-market. It appears that there is a new antitrust investigation taking place in China. Our Emily McCormick is here to tell us what’s going on there. There has really been an increasing scrutiny that is increasing this year.
EMILY MCCORMICK: That’s right, Julie. And now we are seeing a more concentrated effort by Chinese regulators to control the e-commerce and fintech empires of Alibaba and Ant Group. Now, with today’s news, we have the Beijing State Administration for Market Regulation saying that it has launched an antitrust investigation into Alibaba.
And other regulators have also called a meeting with the Ant Group to pressure the company to implement new financial regulations. And the connection between these two companies, of course, is that Alibaba has a 33% stake in Ant Group. Now, with the antitrust investigation into Alibaba, regulators are focusing on reports that the company had pressured traders to commit to selling products only on its platform and not to turn to other competitors.
And then with Ant Group, the focus of this investigation is on Alipay, according to the “Wall Street Journal”. And regulators are concerned that Alipay has resorted to monopolistic and anti-competitive behavior to maintain its massive base. And, for sure, Alipay is absolutely huge, especially in mainland China.
It has more than 1 billion global users and processed about $ 18 trillion in mainland China in the year through the end of June. Now, all of this is happening, of course, just over a month after Beijing also suspended the Ant Group’s IPO and specifically the double listing of Hong Kong and Shanghai, which had been defined as the largest IPO in the world, valued about $ 34.5 billion.
So all of this is being interpreted as Beijing’s moves to try to really crack down on its biggest tech giants, seen as perhaps growing a little too fast and, as a result, upsetting society. Now, the last thing I want to highlight here is what some Wall Street analysts are saying about these polls. Aaron Kessler, of Raymond James in particular, wrote in a note this morning that he is not necessarily very concerned yet if you are a shareholder in Alibaba.
He wrote, quoting, “We believe that the most likely outcome is the termination of these exclusive relationships, although it is difficult at this point to quantify the potential impact on revenue.” And he has a strong share buy rating. Now, with all that said, we are seeing Alibaba’s shares, those American deposit receipts falling by about 10% in the pre-market. So there is a little bit of concern here about this further scrutiny. Julie and Brian.
JULIE HYMAN: Thank you very much, Emily. Our Emily McCormick there. And Brian, just to resume this discussion. I mean, for me, one of the biggest questions around this whole situation is where is Jack Ma, right? He has not been seen in public since October 24. That was when he delivered a speech that criticized financial regulators.
He said they were stifling innovation. He didn’t– again, he hasn’t been seen in public since. And it is very interesting. I mean, here in the USA, of course, there is an antitrust scrutiny from our tech giants. And here, of course, there is also a small bleed between the policy and the actual antitrust violations.
There, it is even more thorny to try to find out how much is happening because the Chinese authorities are personally upset with Jack Ma and how much it is because the company represents any kind of reality [? antitrust, ?] kind of threat. And I don’t know if it is even possible to separate the two here.
BRIAN SOZZI: Yes, Julie, and I think it really highlights the risk for American investors to continue to invest in a company like Alibaba. Now, it is a company that I have seen grow significantly over the past five years. The stock is generally doing well. But you speak to many analysts on the street, you speak to many retail investors who are investing in Alibaba, and it is still a very difficult company to understand.
I talked to some people who said it’s like a black box. But the results have been so strong that it is difficult not to bet on action. But I want to highlight the two keywords of what Emily may have just said. Strong purchase rating. You look at the analyst’s coverage, the Wall Street analyst’s coverage out there on Alibaba. 64 analysts cover this company.
Some of the largest amounts of coverage for any stock I follow out there. This is too big. Typically, you have about 20, 30 analysts following a broadly covered company, say, like a Walmart. 62 of those 64 analysts rate Alibaba’s shares as a buyout. You have two holds and 0 sales. So, if these regulatory issues really continue to escalate, you must ask yourself, at one point, does Street take a step back, reevaluate its earnings estimates and downgrade stocks?
It hasn’t happened yet, but it certainly could because you have a very optimistic Wall Street community on Alibaba.
JULIE HYMAN: You do. And that might leave Alibaba a little bit vulnerable to the kind of setback we see today, right? I mean, the drop we’re seeing in Alibaba’s shares today is nowhere near what we saw for US tech giants when they were subjected to antitrust scrutiny, right? They barely moved.
And, clearly, it is a very different situation. In China, you don’t need to get Congressional approval, you just need a guy to give the floor if you intend to do some kind of antitrust regulation. The Ant Financial situation is obviously also a big risk for investors, right, because that IPO was pulled by the financial regulators there.
So this is also something to consider when you’re talking about the investment risks you’re pointing out, Brian. We were looking at the chart for the year to date just a few moments ago and we just wanted to highlight what we saw there, because stocks are still up about 21% in the year. But that retreat we had since Jack Ma’s speech basically ended – it kind of marked the turning point for stocks and then the subsequent Ant Financial situation. We saw it retreat from an increase of around $ 317 or more to where it stands today at 256.