It has been a while since there has been good news for investors from Alibaba (NYSE:BABA) to get excited. Antitrust concerns last year were compounded by significant delisting risk on U.S. stock exchanges, which was in turn overshadowed by the impact of rising interest rates and the strong sense of risk aversion that has been in place so far in 2022. Together, these have sent shares of the Chinese e-commerce giant down 75% from its 2020 high. But that’s starting to look like a bottom, and given how strongly Alibaba has been able to rally on the right terms in the past, investors might want to sit up and take notice.
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Alibaba shares jumped 15% in yesterday’s session, a move that was no doubt helped by the strong performance seen across all stocks, but mainly driven by the company’s latest results. They were released before the start of Thursday’s session and came in pretty strong. EPS and revenue exceeded analysts’ expectations, with the latter posting 9% year-on-year growth. Their annual active consumers across the world have reached around 1.3 billion, which is an astonishing number and gives an idea of the magnitude of the potential offered by Alibaba.
Unsurprisingly, management struck a bullish tone, saying with the release that “we believe our business will continue to generate strong operating cash flow to maintain strategic flexibility as we calibrate our operations to changing economic and competitive circumstances. In fiscal 2023, our operating principles are to focus on sustainable, high-quality revenue growth and to optimize our cost structure to improve overall performance.
However, given the short-term headwinds that still exist, they again refrained from offering an update to the guidance, which will remain a wake-up call for many investors. At this point, they said that “since mid-March 2022, our domestic operations have been significantly impacted by the resurgence of COVID-19 in China, particularly in Shanghai. Given the risks and uncertainties arising from COVID-19 , which we cannot control and are difficult for us to predict, we believe it is prudent at this time not to give financial guidance as we generally do at the beginning of the year.
Still, investors and Wall Street were more than happy to buy into the potential rally rally we now have in our hands. Alibaba’s upbeat report was seen as a sign the company’s business has weathered the worst of the widespread lockdowns this year that have become so common in Shanghai and other cities across China. The thinking here is if they can handle that kind of performance in that kind of environment, what will be possible once COVID becomes the backpage story that it already is in most western countries ?
In addition, concerns about the ruling Communist Party’s antitrust stance appear to be easing. It’s only been two weeks since Chinese Vice Premier Liu He told top tech company executives that government-business relations would be “properly handled”. It was also reported that Liu said China would continue to lead “the battle for key core technologies”, another sign that China is easing regulatory pressures on its tech companies. So with two of the biggest risks, COVID-related disruptions and antitrust measures, beginning to take a back seat, the one big one still acting as a major disruption on equities is the SEC here in the United States.
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Earlier this week, a Securities and Exchange Commission official said “significant problems remain” in resolving the lack of transparency about whether Chinese companies can be audited. YJ Fischer, director of the Office of International Affairs, said the Public Enterprise Accounting Oversight Board, or PCAOB, needs access to Chinese companies’ audit documents and that the claim that audit documents audit cannot be produced for national security reasons is “questionable at best.” In addition, Fischer noted that while there have been “continuing and productive discussions” between U.S. and Chinese authorities regarding audit investigations, time is “running fast.”
If Alibaba and the other Chinese tech giants can overcome this hurdle, you have to think that most of the pressure that pushed them this far is off. And if that happens, their stocks will suddenly start looking very cheap at under $100.
Should you invest $1,000 in Alibaba Group right now?
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Article by Sam Quirke, MarketBeat