Alibaba Stock Continues Its Dismal Run Amid China Tech Rout

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Alibaba stock (NYSE: BABA) closed lower in Hong Kong price action today amid the selling spree in Chinese tech stocks led by the steep fall in Baidu (NYSE: BIDU) shares.

Baidu stock fell in double digits and had its worst day in over a year amid reports linking its Ernie AI platform to key Chinese military research. Notably, the US has sanctioned several entities linked to the Chinese military and also placed export restrictions on chips that have dual military and civilian use.

Baidu stock falls after reports of Ernie being used for military research

Baidu launched its Ernie chatbot last year which was seen as an answer to OpenAI’s ChatGPT. Alibaba also launched its AI chatbot last year as the AI war between the US and China heated up.

Baidu has tried to downplay reports of Ernie being used for military research and said, “Baidu has no affiliation or other partnership with the academic institution in question.” The spokesperson added, “We have no knowledge of the research project, and if our LLM was used, it would have been the version publicly available online.”

Meanwhile, markets don’t seem to buy Baidu’s argument and Chinese tech stocks including Alibaba, Xpeng Motors, and NIO fell sharply in Hong Kong trading.

According to Steven Leung, executive director at UOB Kay Hian Hong Kong Ltd, “People are worried about sanctions on Baidu obviously after the news report about military ties. They fear that the US government may announce measures to target Baidu.”

He added, “The overall sentiment over China is weak and US-China relationship is still intense, so investors sell first no matter if the news is true or not.”

Alibaba scrapped the IPO of its cloud division

The threat of US sanctions is real and in November Alibaba scrapped the IPO of its cloud division. While releasing its fiscal Q2 2024 earnings, Alibaba said that it shelved the IPO plans “in light of uncertainties created by recent U.S. export restrictions on advanced computing chips. Instead, we will focus on developing a sustainable growth model based on emerging AI-driven demand for networked and highly scaled cloud computing services.”

Notably, the US has banned the exports of high-end chips to China which might hamper the AI ambitions of Chinese tech companies.

During the earnings call, Alibaba said, “when we announced the full spin-off, we were looking at a way to sort of a financial engineering way to show the value of the business.” It however added, “But the circumstances have changed. And right now, rather than focus on financial engineering, we rather focus on figuring out how to grow the cloud business.”

Alibaba is battling a growth slowdown

Alibaba is also battling slowing growth in China and while its revenues in the September quarter rose 9% YoY and were in line with estimates, it missed bottomline estimates. The Chinese e-commerce giant is facing stiff competition from new-age competitors at a time when retail sales in China are not growing at the pace they did before the COVID-19 pandemic.

baba stock

China’s tech crackdown

Chinese tech companies have also been under a scanner amid the continued tech crackdown in China. After a brief lull and signals that the world’s second-largest economy is done with the crackdown, last month China proposed new regulations for online gaming that made markets apprehensive about the sector.

For perspective, China’s tech crackdown began towards the end of 2020 and Alibaba was the prime target. The company’s co-founder Jack Ma made comments critical of the Chinese regulators ahead of the planned IPO of its subsidiary Ant Financial.

Ant IPO was scrapped

Ant was set to IPO in 2020 and raise $37 billion from the mammoth IPO which would have made it the biggest listing ever – surpassing the record set by Alibaba. The IPO received bids worth $3 trillion and Ant was set to have a market cap over JPMorgan Chase, the largest US bank.

However, Chinese regulators blocked the IPO at the last moment. Ma made comments critical of Chinese regulators ahead of the IPO which did not go well with the powers that be in China.

Not only did China block the IPO of Ant but Ma wasn’t seen in public for months. Chinese regulators also intensified the scrutiny of Alibaba and the company eventually paid a record fine of $2.8 billion in 2021 to settle the antitrust case.

Alibaba stock trades near 2014 IPO price

It’s been a decade since Alibaba went public and the stock is only marginally higher than the IPO price of $68. Last year, it briefly fell below the IPO price amid the sell-off in Chinese stocks. Apart from the business restructuring, Alibaba has taken several steps to revive its sagging fortunes.

For instance, it initiated a dividend of $1 per ADS (American Depository Share) in November which would mean a cash outflow of around $2.5 billion, and noted that it has another $13 billion available under its share buyback plan. However, the company ruled out a special dividend to lower the cash on the balance sheet.

Alibaba said that it generated free cash flows of $27 billion in the last 12 months and had around $63 billion in cash and cash equivalents on the balance sheet at the end of September. It stressed, “Alibaba has never been in a better financial position to invest for the growth of our businesses.”

Meanwhile, amid multiple headwinds, Alibaba shares are yet again approaching their all-time lows. While the valuations of Chinese tech stocks have taken a beating, not all believe that the sector can recover anytime soon. Several US fund managers exited Chinese stocks after the tech crackdown and called them “uninvestable.”

The continued tech crackdown and fears of sanctions on Chinese tech companies amid apprehensions that their services might be used by the Chinese military might not help matters either.

About Mohit PRO INVESTOR

Mohit Oberoi is a freelance finance writer based in India. He has completed his MBA in finance as a major. He has over 15 years of experience in financial markets. He has been writing extensively on global markets for the last eight years and has written over 7,500 articles. He covers metals, electric vehicles, asset managers, tech stocks, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.