Alibaba share price’s 11% surge may be fool’s gold

Immortalised in Antoine Galland’s 18th-century French translation of ‘Arabian Nights,’ Ali Baba was a poor woodcutter who stole treasure from the cave hideout of 40 thieves, the door to which could only be opened by uttering the magical command ‘Open Sesame!’

Unfortunately for the company that inherited this namesake, making money in China is not quite so simple.

Alibaba share price: buyback increases

Alibaba (NYSE: BABA) has decided to upsize its share repurchase program by $10 billion to $25 billion, ‘in a sign of confidence about the Company’s continued growth in the future.’ Having already repurchased 56.2 million American depositary shares worth $9.2 billion, the renewed program will run for two years until March 2024.

The e-commerce giant has also appointed Weijian Shan, executive chairman of investment group PAG, as an independent director.

In further good news, despite the collateral damage being caused to Sino-American political relations by Russia’s invasion of Ukraine, the stand-off between US and Chinese regulators over US audit access to US-listed Chinese stocks appears to be thawing. The Securities and Exchange Commission had been on the verge of delisting some Chinese stocks over the issue.

But now Reuters has reported that Chinese regulators have asked some US-listed Chinese companies, including Alibaba, to submit audit reports to US regulators.

This de-escalation comes after the Chairman of China’s Financial Stability and Development Committee Liu He confirmed ‘the Chinese government supports companies from across industries to list abroad,’ promising Beijing would ‘boost the economy in the first quarter’ by introducing ‘policies that are favourable to the market.’

The synergistic effect of these two shots of good news saw Alibaba shares shoot up 11% on Tuesday. But this upwards movement may not last.

Pandemic resurgence

37 million Chinese citizens are now back in lockdown, as the ultra-infectious Omicron variant strains the country’s ‘dynamic zero’ covid-19 pandemic policy. Supply chain pressures, employee isolations and factory closures could all be hitting Alibaba soon.

Alibaba and JD.com hold a duopoly over e-commerce in China, together controlling over 60% of total market share. However, Alibaba is the larger of the two and is also the country’s leader in cloud computing services. But with a $300 billion market cap, it comes in a distant second to global titan Amazon's $1.7 trillion value.

On the other hand, Alibaba is generally characterised as a growth stock, while Amazon’s recent stock split may suggest it is moving to a consolidation stage. But China’s regulatory crackdown might now be having the desired effect of preventing companies like Alibaba from growing too powerful.

In late 2020, Alibaba founder Jack Ma’s attempt to launch an Initial Public Offering of Ant Group was suspended when he publicly criticised Chinese authorities. The potentially $300 billion company now remains in regulatory purgatory.

Since then, Chinese regulators have introduced anti-monopoly legislation focussed on the ‘platform economy,’ covering companies that provide services or goods via the internet. They have also introduced legislation shoring up data security and protection laws, often with little to no warning.

The result has been large fines and record stock falls. Alibaba itself was fined $2.8 billion, or 4% of 2019 annual revenue, in an anti-monopoly probe in April last year. China claimed it was restricting merchants from doing business or running promotions on the site without paying exorbitant fees.

But Deputy Chief Financial Officer Toby Xu argues ‘Alibaba’s stock price does not fairly reflect the company’s value given our robust financial health and expansion plans.’ In his defence, Q3 results showed revenue had risen 10% year-over-year to $38 billion, while annual active consumers of the ‘Alibaba Ecosystem’ grew by 43 million to 1.28 billion people.

But its share price has fallen from a record high of $310 in October 2020 to a record low of $77 on Tuesday last week. Regulatory issues on both sides of the Pacific are anchors that have not been reeled in by the $9.2 billion spent on buybacks so far.

While Alibaba shares have now recovered to $115, the additional $15 billion may not help the share price in the long-term either, especially if regulatory issues persist.

And with an enlarged share buyback, this apparent growth stock might be warning investors that it cannot invest their money to generate future returns.

Far from a cave of wonders, Alibaba’s share price surge may be fool’s gold.