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Alibaba and other Chinese tech stocks were on a wild ride in 2022.
Qilai Shen/Bloomberg
Alibaba
,
JD.com
,
and other US-listed Chinese tech stocks fell days after posting significant gains. There is still some headwind for the industry.
Alibaba
(Ticker: BABA) lost 2% in US premarket on Wednesday, with e-commerce peer
JD.com
(JD) also down 2%. The declines have continued since Tuesday, when Alibaba plunged 5.5% and JD.com plunged nearly 4%.
One factor weighing on these stocks is broader market sentiment, with investors selling off technology stocks as they prepare for the Federal Reserve to tighten monetary policy more aggressively this year to combat high inflation.
Bond yields rose and futures markets are pricing in the largest rate hikes in a single year since 1994 after Fed Governor Lael Brainard’s hawkish comments on Tuesday. Investors are also expecting a reduction in the central bank’s huge holdings of debt securities, which were purchased during the pandemic and earlier to prop up the economy.
The techie
Nasdaq Composite
cut below average
dow
and
S&P 500,
and should do the same on Wednesday.
Elevated bond yields hurt technology stocks in particular, as these companies have market valuations that bet on future earnings, and higher bond yields reduce the discounted present value of future cash. The yield on the benchmark 10-year US Treasury bond neared 2.64% on Wednesday, its highest level since early 2019.
There are also sector-specific issues that are putting pressure on Alibaba and its peers. China has faced a fresh wave of Covid-19 infections in recent weeks and has taken strict measures to combat the spread of the virus, including lockdowns in its largest city, Shanghai.
That doesn’t bode well for the Chinese economy — particularly in the area of consumer spending, which is so important to Alibaba, JD.com, and others in e-commerce.
“With the increasing prevalence of Covid cases and city lockdowns, we believe overall economic activity in China has been negatively impacted, which has moderated [Alibaba’s] earnings growth for [the March quarter]said Alicia Yap, analyst at
city
,
in a note on Wednesday. “We believe the impact of Covid will drag on [the current quarter] and possibly delay [the second half of 2022’s] recovery trend.”
Also in the background for the entire universe of US-listed Chinese stocks – including the electric vehicle maker
NEVER
(
NEVER
), the embattled mobility group
DiDi Global
(DIDI) and others – are regulatory concerns.
Alibaba and JD.com posted record gains in March — by far their best single-day performances as shares soared nearly 40% — following news out of China that the government would support the stock market. These included plans to clarify a stringent regulatory environment, including removing uncertainty surrounding the delisting of the country’s largest companies in the United States
There have been headwinds for the delisting in recent months as Washington renewed the prospect that Chinese companies could be forced to be delisted in the US for failing to comply with accounting transparency laws. The worst appeared to be averted on Monday as China relaxed its audit rules and made concessions to US regulators.
However, analysts have warned that the regulatory picture remains murky. China has made its move, but the US has yet to accept it, so the threat of delisting hasn’t entirely disappeared.
Despite the multiple pressures, analysts are broadly bullish on companies like Alibaba, which has been battered by regulatory uncertainties but shows elements of promise. Brokers polled by FactSet give Alibaba stock a overwhelming Buy rating, with an average price target of $167, implying about 50% upside potential.
“With $15.8 billion outstanding in [stock repurchases]strong cash flow generation and trading near historical lows, that’s what we’re seeing now [price] as attractive,” said Yap of Citi.
Write to Jack Denton at [email protected]
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