Alibaba Group Holding Ltd (NYSE:BABA) stock crashed right after the market opened on Tuesday morning as investors became more wary of the connection between the firm and the brewing stock market crisis in its home country, China. Shares in the firm were down by more than 4% at time of writing as more and more firms were halted from trading on the Chinese stock market.
Reuters reported earlier today that over 700 firms listed on exchanges in Shanghai and Shenzhen had been halted from trading. That represents about a quarter of the total firms listed on those exchanges. Alibaba, which does the vast majority of its business in China, is suffering from worries that the stock market crash will lead to wider problems in the country.
Alibaba Group Holding loses out on China worries
Shares in Alibaba Group hit an all time low of $76.21 this morning as traders flew from any stock connected with the Chinese market. There has long been worries of a slow down in China, but the stock market sell-off appears to have triggered those fears and brought them to bear on the wider market.
The SSE Composite Index (SHA:000001) was down 1.29% for the day and has lost more than 11% in the last five days of trading. Before the current slump hit, the market was flying upward.
Even after counting the current fall the index as a whole is up by more than 80% in the last twelve months of trading. In the last month the index has lost more than 25% of its value.
It wasn’t just Alibaba Group that was suffering from the fall in the Chinese market today. Yahoo! Inc (NASDAQ:YHOO), which still holds a substantial part of the shares in Chinese firm, was also losing as a result of the stock market crash. At time of writing shares in Yahoo! were down by 4.77% on fears that the value of the firm’s best asset was about to crash.
Chinese state intervention fails
Before the market opened in China on Tuesday morning the company’s premier Li Keqiang said that the state had the ability to deal with the problems in the economy, but he did not mention the ongoing fall in the country’s stock market, nor did he address the government’s failed attempt to roll back the losses.
The state has put together a $19 billion buying package through major funds which it exerts control over in order to support the stock market for the time being.
In the State-founded Chinese market, this is something like a share-buyback, though it has not worked as well as the $140 billion program that Apple Inc. (NASDAQ:AAPL) is involved in at the behest of investor Carl Icahn.
Retail investors are responsible for about 85 percent of trading on the Chinese stock market, and shoring up their confidence is the state’s way of trying to make markets return to a more stable pattern.
With the massive number of firms asking to be removed from trading on the market, it seems clear to some of those retail investors that the state is unable to handle the role it has taken on. Shares in US listed Alibaba Group are suffering as a result of that lack of confidence in China’s stock market, and the country’s wider economy.
Alibaba looks beyond China
Alibaba Group debuted on the market last year to instantly become one of the largest tech firms in the world. The firm’s sales still come from China above everywhere else, however. Recent moves to break into other markets around the world have not been a big boost to the firm’s sales just yet, but global expansion was always going to take time.
Daniel Zhang, the firm’s CEO, says that global growth is at the heart of his plans at the head of the Alibaba. In a statement on May 14 he said “We will organize a global team and adopt global thinking to manage the business, and achieve the goal of ‘global buy and global sell.” Mr. Zhang took his position at the head of Alibaba Group in the first week of May.
Global growth sounds good to those with shares in the firm. If growth slows in China, the sales are going to be hurt quite badly. With so much growth priced into the stock at recent market levels, that could really hurt the future of Alibaba.
The firm has pushed into India, the US and Japan with different acquisitions and investments in recent months. None of those are generating the kind of sales that the firm has seen in China, however.
BNP Paribas analyst Vey-Sern Ling, in a report published on June 26, said that he expected Alibaba Group shares to head to $100, and the firm to have strong sales growth, of 25% per year. The analyst expects total sales on the firm’s platform to equal $1.2tn by the end of 2020.
Reacting to China’s troubles
Morgan Stanley Asia Chairman Stephen Roach told CNBC’s Squawk box on Monday that buying into Chinese stock right now would be like “catching a falling knife.” He said clearly that “The bubble is bursting,” and the stock market was a danger to anyone looking for a bargain among the collapsing shares.
Mr. Roach doesn’t think that the current problems in the nation will cause growth to stop. He expects a stable rate of 6.5 percent to 7 percent to prevail despite the headwinds facing the country right now.
If the country is able to keep stable, that would mean a lot to those holding shares in Alibaba, and those invested in Yahoo!.
Betting on Alibaba’s future
Alibaba Group has been positioned on the market as a bet on Chinese e-commerce as a whole. The firm is the world’s largest e-commerce site, and it’s by far the biggest firm in the area on the Chinese web. With the Chinese economy looking weaker, traders are betting against huge growth in that market for the rest of the year.
Those, like Mr. Roach, who think that China’s current problems are a substantial blip but nothing stronger, may think of buying into Alibaba while the price of the stock is low, in order to be exposed to the future of the bustling Chinese web market.
With a P/E of close to 50, even after today’s price fall is taken into account, it’s important to remember that stock in Alibaba is still pricing in a huge amount of growth in China in the years ahead.
Some investors seemed to be making that bet on growth at the firm. At time of writing shares in Alibaba were up from this morning’s lows as some gave into the temptation to grab the firm’s stock at an all time low.
Mr. Roach said that Chinese stocks were like a “falling knife” but he didn’t make reference to Alibaba which avoided most of the excess of China’s stock market rush in the last year. Time will tell if buying in at today’s lows was a good bet on long term growth in Asia.