Shares of Alibaba (BABA 0.64%) were flying higher on Monday after the company received a $2.8 billion fine from China's anti-monopoly regulator, the State Administration for Market Supervision (SAMR).
It might seem strange for the Chinese e-commerce stock to jump on the news, climbing as much as 9%, since the announcement had the reverse of a buy-the-rumor/sell-the-news effect. But that's because investors had been fearing the threat of a fine from SAMR since December when the agency first announced an investigation into Alibaba.
That news caused Alibaba shares to plunge 13% on Dec. 24, wiping out $100 billion in the stock's market value, though today Alibaba recouped more than half of those losses.
Image source: Alibaba.
SAMR arrived at the $2.8 billion figure because it was 4% of the company's sales in China for 2019, though the penalty could have been as high as 10%. The dollar amount may sound like a substantial fine, but investors seem to be viewing it as more of a slap on the wrist. After all, Alibaba made $9.1 billion in adjusted net income in its most recent quarter, meaning the fine amounts to just about one month's worth of profits.
While investors have been fearful of the regulatory grip of the Chinese government, the fine is also notably less than the penalties that Facebook and Alphabet have paid. In 2019, Facebook was fined $5 billion by the Federal Trade Commission over violating consumers' privacy rights, and the stock barely flinched. Alphabet's Google, meanwhile, was forced to pay $9.7 billion in three antitrust cases in the EU.
Big fines, it seems, come with the territory in big tech since these companies, by virtue of their size, tend to accumulate monopolistic advantages, which is partly why the stocks have been historical winners.
In a statement, Alibaba said it accepted the penalty "with sincerity," adding, "We are committed to ensuring an operating environment for our merchants and partners that is more open, more equitable, more efficient and more inclusive in sharing the fruits of growth." The investigation centered around Alibaba's unfair treatment of its merchants, including restricting them from selling on other platforms.
Consequences, consequences
There's more to the penalty than just the fine; Alibaba said that it would lower the fees it charges its merchants and invest in new services for them. But it doesn't expect a material impact to its financial results from the policy changes.
Investors have also been more broadly fearful about a crackdown against Alibaba after the Chinese government blocked the initial public offering of Ant Group, Alibaba's financial arm, in November following disrespectful comments Alibaba founder Jack Ma made about government officials at a conference in October. For weeks, Ma was to rumored to be "missing" as he kept out of sight after the conference, and Alibaba stock jumped when he made a public appearance in January.
Ant Group, meanwhile, is now in the process of restructuring its business as a financial holding company to gain compliance with Chinese regulators, but it's unclear if it will make another attempt at an IPO.
Separately, Alibaba and other Chinese companies could potentially be delisted from U.S. exchanges if they don't comply with certain rules requiring them to show U.S. regulators their financial audits.
Some perspective
Chinese stocks tend to trade at a discount to their American peers due in part to investor cautiousness about the influence of the Chinese Communist Party. However, the effect of China's anti-monopoly law in this instance isn't much different from that of similar laws in the U.S. and Europe. You can see that not only from the fines against Facebook and Google, but also from the increased scrutiny on all U.S. tech giants, like Apple and Amazon, around antitrust concerns. These include Amazon's own treatment of its third-party sellers, and Apple's 30% commissions on app developers, both of which resemble the Chinese government's own concerns about Alibaba.
Notably, Tencent, the WeChat owner and other Chinese tech giant, was reportedly allowed to move forward last week with its acquisition of Sogou, China's third-biggest search engine -- a sign that the Chinese government may not be as determined to crack down on big tech as investors seem to believe.
Alibaba certainly faces risks ahead, but they don't seem to be much different from those that the big U.S. tech stocks like Facebook and Alphabet are confronting, which is expected for companies that have become as dominant as they are.
With the antitrust investigation now in the rearview mirror, the biggest risk for Alibaba and its investors is behind it. While government interference does pose a continued threat, the company is growing so fast and the stock is so cheap right now that this is still a great buying opportunity.
