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Wednesday, April 06, 2022 6:56:29 PM
By: Barron's | April 6, 2022
Alibaba , JD.com , and other U.S.-listed Chinese tech stocks have fallen back days after recording significant gains. There are still a number of headwinds for the sector.
Alibaba (ticker: BABA) lost 2% in the U.S. premarket on Wednesday, with e-commerce peer JD.com (JD) also 2% lower. The declines continue losses from Tuesday, when Alibaba slipped 5.5% and JD.com sank nearly 4%.
One factor weighing on these stocks is sentiment in the wider market, where investors are shedding tech stocks as they prepare for the Federal Reserve to more aggressively tighten monetary policy this year to combat high inflation.
Following hawkish remarks from Fed Gov. Lael Brainard on Tuesday, bond yields spiked and futures markets moved to price in the most interest-rate increases in a single year since 1994. Investors are also expecting a reduction in the central bank’s enormous holdings of debt securities, acquired during the pandemic and earlier as a way to prop up the economy.
The tech-heavy Nasdaq Composite underperformed the Dow and S&P 500, and was set to do the same on Wednesday.
Elevated bond yields, in particular, hurt tech stocks because these companies have market valuations banking on profits years in the future, and higher bond yields reduce the discounted present value of future cash. The yield on the benchmark 10-year U.S. Treasury note neared 2.64% on Wednesday, its highest level since early 2019.
There are also sector-specific themes pressuring Alibaba and its peers. China has faced a new wave of Covid-19 infections in recent weeks, instituting tough measures to combat the spread of the virus, including lockdowns in its biggest city, Shanghai.
This doesn’t bode well for the Chinese economy—especially in the realm of consumer spending, which is so important for Alibaba, JD.com, and others in e-commerce.
“In light of the widening spread of Covid cases and city lockdowns, we believe overall economic activities in China have been negatively affected which has dampened [Alibaba’s] profit growth for [the March quarter],” said Alicia Yap, an analyst at Citi, in a note on Wednesday. “We believe the Covid impact will drag on into [the current quarter] and possibly delay [the second half of 2022’s] recovery trend.”
Also in the background for the entire universe of U.S.-listed Chinese stocks—which includes electric-vehicle maker NIO ( NIO ), the embattled mobility group DiDi Global (DIDI), and others—are regulatory concerns.
Alibaba and JD.com notched record gains in March—seeing, by far, their best one-day performances with the stocks jumping almost 40%—following news out of China that the government would support the stock market. That included plans to clear up a punishing regulatory environment, including removing uncertainty related to the country’s largest companies losing their listings in the U.S.
Delisting headwinds have picked up in recent months as Washington has renewed the prospect that Chinese companies may be forced to delist in the U.S. if they don’t meet accounting transparency laws. The worst looked to be averted on Monday as China moved to ease its auditing rules and make concessions to U.S. regulators.
But analysts have cautioned that the regulatory picture remains cloudy. China has made its move, but the U.S. has yet to accept it, so the threat of delisting hasn’t completely disappeared.
Despite the multiple pressures, analysts are, by and large, bullish on the likes of Alibaba, which has been beaten down by regulatory uncertainty but has promising elements. Brokers surveyed by FactSet overwhelmingly rate Alibaba stock at Buy with an average target for the price of $167, implying around 50% upside.
“With US$15.8bn outstanding in [stock repurchases], strong cash flow generation and trading near historical trough, we see current [price] level as attractive,” said Yap at Citi.
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