Last week, Alibaba (NYSE:BABA) and many widely followed China-based companies bounced back from multi-year lows. Alibaba’s rebound is worth watching because many funds and foreign investors (to China) own the stock.
Did Alibaba finally bottom?
Alibaba pledged a massive $15.5 billion over five years to Beijing to support its ‘common prosperity’ initiative. China wants to distribute assets from the wealth to the common people. 40% have a very low net worth. China needs to manage poverty as the economy slows. It implemented hundreds of regulations that will limit the momentum that Alibaba and many fast-growing firms enjoyed in the last five years.
On Sep. 1, Ant Group reportedly formed a personal credit scoring joint venture with Zhejiang Tourism Investment Group. Together with state-backed firms, it wants to revive the initial public offering plans of Ant Financial. Alibaba owns a third of the firm, so an IPO would unlock its value. Alibaba will need more cash on hand as regulatory costs weigh on cash flow. Furthermore, stricter e-commerce rules that protect the consumer and prevent predatory and monopolistic behavior will slow Alibaba’s historical growth.
Alibaba stock may have stopped falling for now. The bottom is not yet known. Shareholders should not expect out-performance until China finalizes its new rules. That could take a few more months to play out. Investors will probably keep the stock for now. Those who do not hold shares will likely avoid the stock until the harsh political oversight ends.