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Why Alibaba Shares Have Surged More Than 10% So Far This Week

By Billy Duberstein – Dec 10, 2021 at 8:20AM

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The Chinese e-commerce leader shook up management, and China's central bank turned dovish.

What happened

Shares of Alibaba Group Holding (BABA 0.44%) were bouncing off their lows this week. As of this writing Friday morning, shares were 10.4% higher than their close last Friday.

"Change" seemed to be the word of the week for Alibaba and Chinese stocks broadly. Before this week, it seemed as if Alibaba's stock would go down forever, reaching its lowest point since 2017 last week. However, a management change was welcomed by shareholders, as was a dovish turn by China's central bank.

Young parent sips coffee looking at laptop with his baby on his lap.

Image source: Getty Images.

So what

On Monday, Alibaba said it would be changing its chief financial officer (CFO) in April 2022, when Tony Xu will replace Maggie Wu. To be sure, it's not the CFO's fault that China's Communist Party has thrown down the gauntlet on Alibaba over the past year. One can thank comments by founder Jack Ma in late 2020 for that. Over the past year, Chinese authorities have gone after Alibaba in a campaign that included billions in regulatory fines, the breaking up of Ant Financial into three companies, as well as regulations aimed at weakening Alibaba's e-commerce moat to promote more competition. 

However, outside of Alibaba's core business, basically no other new Alibaba business -- whether acquired or organically built -- is currently profitable. Many investors have faith that these growing new commerce businesses in grocery, delivery logistics, digital entertainment, and other areas will eventually be profit contributors. Although I do think Alibaba's cloud will eventually become nicely profitable, all the other businesses are in very competitive fields and are no sure thing. Perhaps a new CFO will focus more on the bottom line, and not just the top.

Besides optimism over the management change, many Chinese stocks rose as the government seemed to change its tack to promote growth next year, after popping the country's property bubble this summer. A leading Chinese think tank proposed a 5% 2022 growth target on Monday, after many had thought China might dip into negative annual GDP growth for the first time since the 1970s.

In conjunction, the required reserve ratio for banks in the country was lowered from 8.9% to 8.4% on Monday, meaning they will be able to lend more and hold less capital, which is stimulating to the economy. While that measure may or may not work in reversing China's economic fortunes, it is a sign Beijing could be shifting from a tightening posture, especially in real estate, to loosening conditions to boost the economy.

Now what

Alibaba is now down a whopping 53% over the past 12 months, and looks screamingly cheap at just 12.7 times next year's earnings estimates, even after this week's bounce.

But investors also have to deal with a somewhat unpredictable Chinese Communist Party, and if it chooses to harm Alibaba shareholders further in the name of its political goals. In addition, competition is intensifying in Alibaba's core e-commerce segment. So the stock remains a big question mark, even at this low valuation and after a (rare) good week.

Billy Duberstein owns Alibaba Group Holding Ltd. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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