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Why Alibaba Stock Tumbled 8% Yesterday

On a bearish day for Chinese stocks, Alibaba took a big hit and dropped 8% during the March 10 session. Here’s what happened.

The freefall of Chinese e-commerce giant Alibaba’s  (BABA) - Get Alibaba Group Holding Limited American Depositary Shares each representing eight Report shares seems to have no end. Now at the lowest levels since the end of 2016, the stock has moved further away from $100, and trades at around $93 apiece.

Business fundamentals may have nothing to do with this. Rather, political and regulatory concerns in China have been impacting that country’s stocks across the board.

Also, high inflation, rising rates, the risk of economic deceleration and geopolitical tensions in Ukraine have not helped Alibaba stock either.

Figure 1: Why Alibaba Stock Tumbled 8% Yesterday

Figure 1: Why Alibaba Stock Tumbled 8% Yesterday

(Read more from Wall Street Memes: NIO Stock Zips Higher: Will It Rally Next?)

Chinese stocks sell off

The fall of Alibaba shares during the March 10 trading session is a reflection of broad Chinese market weakness. The iShares MSCI China ETF  (MCHI) - Get iShares MSCI China ETF Report fell nearly 5% on Wednesday. Alibaba represents about 13% of the ETF.

Other Chinese giant stocks such as Nio, JD.com and Tencent also closed the day sharply down. The first was hit particularly hard, one day after it posted strong share price gains.

Figure 2: The fall of Alibaba shares during the March 10 trading session is a reflection of broad Chinese market weakness.

Figure 2: The fall of Alibaba shares during the March 10 trading session is a reflection of broad Chinese market weakness.

Regulatory clampdowns probably at the center

According to CNBC, the SEC identified five ADRs (American Depository Receipts) of Chinese companies that failed to adhere to the Holding Foreign Companies Accountable Act (HFCAA). This is the piece of law that allows regulators to delist companies that cannot be audited for three consecutive years.

While BABA was not one of the five stocks mentioned, it is possible that the entire group of Chinese companies suffered from higher perceived risk.

An eventual ban of large Chinese companies from the NYSE could be impactful. China could be viewed as a non-investable country – something that is probably not in its best interest.

With Alibaba recently having become eligible for its dual listing in Hong Kong, political risk in this case could diminish. So far, however, the market is still acting cautiously.

BABA's fundamentals and valuation: not enough

From a fundamentals standpoint, Alibaba's business continues to be robust, even if it has been facing tough year-ago comps. This is largely due to the winding down of e-commerce tailwinds that were driven by stay-at-home trends in 2020 and 2021.

The company has an aggressive investment plan for the coming quarters. It is expected to allocate considerable capital to growth, while exploring opportunities in areas like cloud computing and storage, digital media and entertainment.

BABA currently trades at a low price-to-earnings ratio of less than 12 times. By comparison, major competitors like Amazon and JD.com command a much higher earnings multiple of 43 and 40 times, respectively.

Regardless of de-risked valuation, it seems like regulatory concerns are driving the narrative in Alibaba's case. Expect investors to keep distancing themselves from Chinese names, at least until the dust settles and these stocks can catch a bid once again.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)