Specifically, management is suggesting an eight-for-one stock split. At current prices, it would drop the stock price to about $20, although it obviously wouldn't alter the value of investors' current holdings or the total market cap of the company.
Remember, when a company goes through a stock split, it only alters the price of the stock and not the value of one's holdings. For instance, if an investor had 10 shares of Alibaba stock trading at $160, they would have a position value of $1,600. After an eight-for-one split, the same investor would own 80 shares at $20, worth a total of $1,600.
It's an illusion, essentially, but one in which management teams up to make their stock appear more attractive. This is why we've seen Apple (AAPL) - Get Report , Exxon Mobil (XOM) - Get Report and others split their stocks in the past. It's also why names like Procter & Gamble (PG) - Get Report and Coca-Cola (KO) - Get Report still trade at what many investors consider reasonable prices despite decades of successful operation.
Alibaba's split will be voted on in about a month, on July 15, and it takes place no later than July 2020. So there's plenty of time for the event to take place, assuming it's approved. The announcement comes ahead of Alibaba's proposed secondary listing in Hong Kong.
Will it affect the trading of the stock?
Trading Alibaba Stock
The news of the stock split is helping to give Alibaba stock a boost on the day, but there's no telling how long that boost will last. First, we don't know if the stock split will be approved. Even if it is, trade-war headlines will likely drive Alibaba, and Chinese equities as a whole, more than stock-specific news will.
That said, if the trade war news subsides or at least improves, the stock will begin to trade more on its own merits again. If the stock split is approved, it could create a positive catalyst for investors, even though it doesn't alter the value of the company. In many cases, we see shares bid higher into the stock split date, although it's unclear if that will happen to Alibaba stock.
At this point, bulls need to see BABA stock reclaim the 20-day moving average just over $160. Reclaiming the 200-day would be a big plus too, at $162.80. In between is a big level, with the 38.2% near $161. Over this $161 to $163 range, and the 50% retracement and 50-day moving average near $171 to $172 is the next target.
Should the $161 to $163 area overpower Alibaba stock and push it lower, investors need to see how shares handle $150. This level buoyed Alibaba in late May. Should it hold, a rebound and retest of $161 to $163 resistance is possible. Failure to hold drops Alibaba stock into no man's land.
This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.