Alibaba Stock Keeps Dropping... Delisting Risk Intensifies?

Okay, there have been a lot of questions and comments about Alibaba lately. So, in this video, I want to talk about what's going on and why this stock continues to slide further despite being quite undervalued already. I mean, the one-year chart shows now a loss of 53%. That's lost 23% in the past month alone, so clearly there's something worrying investors. There's a lot of selling pressure, and I'll cut to the chase: the main reason is that investors are getting increasingly worried that Alibaba will be delisted from the New York Stock Exchange. So, let's get cracking and let's get to the truth of what's going on.

Now, the first thing I wanted to say before we go any further in this video is that you should definitely not cling to anything you see in this video as a reason to either buy, hold, or sell the stock. All right? Personally, I own Alibaba, but I'm not trying to influence your perspective on the company. I'm simply relaying what I have seen. So, as always, do your own research and draw your own conclusions. But with that said, yes, Alibaba has definitely tanked. I'm honestly very surprised that we've gone this far. Charlie Munger was buying in the low 200s. You know, I was pumped when I got my average down to about 160 dollars per share. Yet here we are, we're at 123 per share, and that's after a ten percent bounce overnight.

So why so low? Well, firstly, they did release their September quarter results for 2021, and it didn't hit analysts' expectations. They hit revenue of 200 billion yuan instead of 204 billion yuan estimated, and earnings per share of 11.2 yuan instead of 12.36 yuan expected. The company also reduced its revenue guidance for the year, now only expecting between 20 and 23% growth year on year instead of twenty-nine and a half percent growth. But honestly, I don't even really want to talk about this because at the end of the day, I don't really care whether this quarter they missed analysts' revenue targets by four billion yuan. I don't care if they reduce their growth estimate in the short term from 29.5% to 20 to 23%.

And there are two reasons for this. Firstly, you know, I deem the stock to already be cheap, and an expected 10 to 15% average annual growth rate before this result. So, you can think anything above that's just a bonus. But secondly, I also plan on holding this stock for a long period of time, like five to ten years. And think about this: imagine a company grows at fifteen percent annually for 10 years. They start with earnings of a dollar; in 10 years, they'll have earnings of four dollars and four cents. Do I really care whether this quarter they change their annual guidance from a dollar to 95 cents when I'm confident they'll be at four dollars in ten years? No, I don't.

So, for long-term investors, this is always the conundrum. Yes, you always want to read the quarterlies and listen to the conference calls, but 99% of the time, you don't want to listen to the news surrounding them. You know, most of the time you just want to sit back and say, you know, good work guys, keep chipping away. I'll leave you to it. You know, for example, there have been plenty of Tesla earnings calls where results have been super lumpy or guidance has changed, and the stock maybe, the stocks dropped like 10% quite quickly. But I don't care where they'll be next quarter. All I want to do is I want to sit back and say, well done guys, you know, keep working hard at it. Each quarter is different, but I'll see you guys in 10 years. Keep it up.

You know, so honestly I don't care too much for the short-term fear around say a recent quarterly report. But honestly, that's not even the main reason the stock is going down, as I said at the top of the video. So, let's not get bogged down. As long-term investors buy missed analysts' expectations this quarter, the real reason investors are concerned about Alibaba right now is because of this delisting risk. Will the CCP and the U.S. butt heads hard enough that Alibaba will be pulled from the New York Stock Exchange? As the stock chart demonstrates, people are getting very scared right now that the answer might be leaning more towards yes.

Why do they think that? Well, they think that because of what happened recently with Didi. So, Didi is a Chinese ride-hailing app that has been instructed by the CCP to delist from the New York Stock Exchange. This tanked Didi shares 22% in one day, and naturally, it hit every other U.S.-listed Chinese company as well. So, Alibaba tanked 8.2%, Pinduoduo 8.2%, Baidu 7.8%, JD 7.7%. But what actually happened here? Well, I'll tell you what happened. In June, Didi pushed ahead with a 4.4 billion US initial public offering despite being asked to put it on hold while Chinese officials reviewed its data practices. Aha! The CCP asked them not to IPO on the New York Stock Exchange, and then they just did it anyway. Is that a particularly smart move that's going to impress the CCP? I'd hazard a guess: no.

And what happened? Quote: "The company ran into trouble with Beijing almost immediately after its 4.4 billion initial public offering. The IPO blindsided Chinese regulators, who launched a data security review, pulled Didi products from Chinese app stores, and began a broad overhaul of the framework for international listings by Chinese companies." Yeah, good one, Didi. Very nicely done. Fast forward a few months, quote: "The Cyberspace Administration of China recently signaled to Didi that it wanted the company to delist from the U.S. by the first half of 2022," according to one of the people familiar with the matter.

So, no doubt Didi did a very silly thing poking the bear. But I don't think this will spread to all other U.S.-listed Chinese stocks. In fact, I think China wants to keep these companies listed in the U.S. So, just briefly, for those that don't know, the whole kerfuffle that started this delisting narrative is a little thing called the Holding Foreign Companies Accountable Act. After the U.S.-listed Chinese company Luckin Coffee was called out for fudging their numbers, the Holding Foreign Companies Accountable Act was implemented. It pretty much says that the PCAOB, which is a U.S. accounting oversight board, must be able to inspect the auditors of the big Chinese companies, or the Chinese companies will be delisted in the States. Seems fair enough. But the CCP currently doesn't allow for that to happen; the PCAOB is not allowed to inspect the Chinese auditors.

So, they have to figure out a way around this issue, but they're working on it. And if you're seeing what's happening with Didi and you think the exact same thing is going to happen to Alibaba, I'd encourage you to read through this article from Reuters. Quote: "We don't think that delisting of Chinese firms from the U.S. market is a good thing for either the companies, for global investors, or for Chinese-U.S. relations." But wait, who said that? Shen Bing, Director General of the China Security Regulatory Commission's Department of International Affairs. Yes, China said that. Quote: "We are working very hard to resolve the auditing issue with U.S. counterparts. The communication is currently smooth and open. There is a risk of delisting of these companies, but we are working very hard to prevent it from happening," he added.

So, yes, there is a risk, but they're going to avoid it if they can. I wouldn't assume Didi equals Alibaba. In my opinion, Didi is just getting punished by the CCP, but that's not the end of the story for Alibaba. And for this bit, I wanted to give a big shout out to More Money, who covered this point really well in a recent video he made on Alibaba. So lately, there have been reports in the U.S. media that China is actually going to crack down on the VIE structure. China is planning to ban companies from going public on foreign stock markets through Variable Interest Entities, according to people familiar with the matter, closing a loophole long used by the country's technology industry to raise capital from overseas investors.

Companies currently listed in the U.S. and Hong Kong that use VIEs would need to make adjustments so their ownership structures are more transparent in regulatory reviews, especially in sectors off-limits for foreign investment, the people said. It's unclear if that would mean a revamp of shareholders or more drastically, a delisting of the most sensitive firms. So, this doesn't sound great, but the article also shows no legitimate source for this information, so it's a rumor. And then fast forward a couple of days, we actually get information coming directly out of China saying, quote: "China's top securities regulator said on Sunday that reports by certain overseas media outlets on a so-called ban on companies using the Variable Interest Entity structure seeking overseas listings and demands that Chinese companies delist from the U.S. stock exchanges are completely wrong."

The China Securities Regulatory Commission (CSRC) said in a statement on its website that relevant authorities in China have always been open to and fully respect Chinese companies' independent choices of overseas listing venues in compliance with relevant laws and regulations. Some foreign media outlets' recent reports that the Chinese regulators will ban overseas listings of companies with VIE structures and demand that Chinese companies delist from the U.S. stock exchanges are a complete misunderstanding and misinterpretation, said the CSRC.

So, there you go. I think that's a pretty clear message from the China Securities Regulatory Commission. Yes, there is a risk of delisting, but they aren't trying to force these Chinese companies to delist. In fact, the U.S. and China are actually working pretty hard right now, working together to try and ensure that things remain as they are. So, anyway, guys, that's the story as to why Alibaba has sunk so far. Although interestingly, with this information out of the CSRC, the shares have already bounced back up 10%, so clearly investors have gained considerable confidence in hearing that story out of China.

But you know, let me know what you think in the comment section below. Are you interested in Alibaba? Are you leaving Chinese stocks alone? Let me know your thoughts in the comments below. Personally, I'm still very much in the camp of heads I win, tails I don’t lose much, but honestly, that's just me. You may have a different opinion, so let me know that stuff down in the comment section below. If you enjoyed this video, if you found it useful, leave a like on it. As always, subscribe to the channel if you haven't done so already. You can support the channel and our expansion that we're going through at the moment on Patreon. I just hired a video editor, which is exciting.

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But guys, that would just about do us for today. Thank you guys for watching, and I'll see you all in the next video.