Why Alibaba Stock Fell Hard on Tuesday
Shares of Alibaba (NYSE: BABA) fell on Tuesday, down 5.7% as of 2:48 p.m. ET. There wasn't any material news on the company today, so the decline likely had to do with a risk-off mentality, reversing big gains from yesterday.
Monday had seen Alibaba and other Chinese stocks rise sharply after regulators in China proposed changing a rule that prohibits non-Chinese agencies from reviewing company audit documents. That signaled China could be on its way to cooperating with the Holding Foreign Companies Accountable Act, which requires any foreign company listed on U.S. exchanges to have their books audited by U.S. agencies within three years as a condition of staying listed.
So, was Monday's rise a false start?
So what
There is some reason to be skeptical that Chinese stocks and American depositary receipts have the all-clear from delisting. In fact, the possibility is still very real.
According to an article in Barron's yesterday, Chinese authorities have only removed some restrictive language, and companies must first get all audit documents approved by Chinese authorities before showing them to U.S. regulators. But the U.S. Public Company Accounting Oversight Board, in charge of enforcing the rule, is still requiring full compliance and access.
So while Chinese authorities have signaled some room on divulging company information, the Chinese Communist Party still wants control of the process. Yet the U.S. is wary of trusting Chinese authorities to be fully forthcoming; likely, the worry is that China will only disclose partial documents to U.S. regulators. Authorities there say they have the right to withhold access for any document that might disclose state secrets or harm the country's interests, but that is a pretty broad term.
In any case, there is still a way to go on negotiations before U.S.-listed Chinese stocks don't have to worry about delisting. When you combine that potential disappointment with a general risk-off mentality affecting the markets and tech stocks on Tuesday, due to rising long-term rates and heightened tensions with Russia, it's a recipe for Alibaba giving back all of Monday's gains.
Image source: Getty Images.
Now what
There is a lot of chaos and volatility with Chinese stocks today. A slowing economy in China, COVID-19 lockdowns, and the country's close relationship with Russia have led to considerable angst. Add in the still-real potential for delisting, and there is a lot of risk in U.S.-listed Chinese stocks today.
And leading Chinese tech names are down by huge amounts over the past year. Alibaba is perhaps the poster child of the Chinese tech stock crash, currently trading at just 12 times next year's earnings estimates. Investors will have to weigh the high risks alongside a valuation that's much lower than U.S. technology peers. If you are interested in Alibaba's stock, you might want to buy shares listed in Hong Kong and not the U.S., if your broker allows it.
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Billy Duberstein owns Alibaba Group Holding Ltd. His clients may own shares in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
