Why Alibaba Stock Dropped Today
What happened
Shares of China's Alibaba Group Holding (NYSE: BABA) stock tumbled on Tuesday, down 2.8% as of 1:45 p.m. ET after Reuters reported that the U.S. government is investigating its cloud business "to determine whether it poses a risk to U.S. national security."
So what
The Biden administration's investigation centers on worries that the Chinese government might gain access to personal information of U.S. customers of the Chinese e-commerce giant, the news agency reports. Corollary concerns regarding the safety of intellectual property stored on Alibaba Cloud and about Beijing's ability "to disrupt access by U.S. users to their information stored on Alibaba cloud" were also mentioned.
Image source: Getty Images.
It's unclear precisely how big of a risk this investigation is to Alibaba. As Reuters points out, the company's U.S. cloud business is very small at present -- just $50 million in annual revenue. But the news agency notes that U.S. regulators could potentially take measures up to and including prohibiting American consumers and businesses from doing business with Alibaba altogether, if they conclude the risks are too high.
Now what
If that happens, Alibaba won't just lose its existing revenue stream -- but any potential to grow its cloud business in the U.S. at all.
That's the big concern today. Alibaba has stated that its cloud business is the firm's second (of four) "pillars of growth." This means that it's one of the business segments the company is depending upon to prove that analyst predictions that it will grow earnings at less than 5% annually over the next five years (according to data from S&P Global Market Intelligence) are too conservative.
Take away the chance that Alibaba will grow faster than expected, and Alibaba stock -- despite being down nearly 50% over the past year and selling for a P/E ratio of 17.5 times earnings -- might not be the cheap stock it seems to be. If all Alibaba can manage is 5% growth, its stock might actually still cost too much.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
