Alibaba (NYSE:BABA) had made an impressive recovery, gaining as much 80% since it bottomed in late March as the result of the pandemic. The company was riding high, making plans to spin off one of its most lucrative business segments. Unfortunately, the powers that be had other ideas, causing Alibaba's stock to lose as much as 16% of its value.
On this episode of Fool Live that aired on Nov. 16, "The Wrap" host Jason Hall and Fool.com contributors Danny Vena and Brian Withers discuss the circumstances that precipitated the stock's decline, providing a cautionary tale for investors in Chinese stocks.
Danny Vena: I actually am following the recent story and I'd be happy to respond to the question that Steve is asking.
Jason Hall: Please do. From Steve, the question is "Could you guys please give us your opinion on Alibaba stock because it's dropping lately because of the antitrust issues in China."
Danny Vena: This is a story I've been following for a couple of weeks now. Just to give our viewers a little background, Alibaba Group was set to spin-off its financial arm, Ant Financial. Ant Group was set to IPO in China. It was going to raise a record $37 billion, making it the world's largest public listing. This would have valued the company at about $310 billion. Then all of a sudden it was unceremoniously stopped, and nobody was quite sure immediately what had happened. However, there were some statements that had been made by the company's founder and CEO, Jack Ma, who had been critical of regulators in China, which is not always the brightest thing to do.
Brian Withers: Jack can't really hold his tongue, can he?
Danny Vena: I really don't know what he was thinking, but then the Shanghai Stock Institute came out and said, "Your company's controller, chairman, and general manager have been summoned to be interviewed by the relevant regulatory authorities." In fact, there are some reports, and I don't live in China so I can't comment on the veracity of these claims. But there are some claims even that China's Chairman was the one who told the regulars to stop that IPO.
Jason Hall: I've read the same thing.
Danny Vena: Part of it has to do with the fact that this is a very high-valued company. In the fintech industry it was displacing some of the banks in China. Because of that, there were some concerns with government regulators that perhaps Jack Ma and Alibaba and Ant Financial were getting a little bit too big for their britches, and so they wanted to remind them who was in charge. As a result of that scuttled IPO, and it may come back. Some of the reports I've read said it may come back at about half the valuation that it originally was going to command. But because of that, you're seeing a little bit of a hit to Alibaba stock over the last several weeks.
Jason Hall: There you go. It's going to be a follow on effect. Alibaba is still a giant business. It's still super profitable. But it's China, so you have to just invest with the knowledge that it's a managed economy and the government has extreme levels of control and power that we don't see in western countries.