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Why Alibaba Stock Crashed Today

By Rich Smith – Dec 22, 2021 at 10:58AM

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China is mad at Alibaba. Again.

What happened

Shares of Alibaba Group Holding Limited (BABA -0.06%) stock that popped on positive analyst commentary yesterday fell back to earth on Wednesday after Reuters reported that a key government ministry is cutting ties with Alibaba.

As of 10:30 a.m. ET, Alibaba stock is down 4.8%.

Chinese flag superimposed on a stock market chart.

Image source: Getty Images.

So what

Yesterday, local analyst Chinese CLSA argued that Alibaba could be worth twice its $123 stock price as it expands its business both domestically and internationally, and capitalizes upon "the next big growth pillar" -- cloud computing.  

This morning, however, China's government swept the leg out from under that growth thesis. The Chinese Ministry of Industry and Information Technology (MIIT) has suspended "a cooperative partnership" with Alibaba's Alibaba Cloud subsidiary.  

As Reuters reports today, Alibaba Cloud failed to "immediately report vulnerabilities" in its software to the Apache Log4j2 zero-day exploit, which is arguably the internet's worst security flaw ever. Alibaba apparently did discover the flaw in its code, and quickly notified the U.S. Apache Software Foundation, seeking assistance. But MIIT only found out about Alibaba's vulnerability when a third party informed MIIT of this.  

Now what

As punishment for this failure, MIIT has ceased cooperating with Alibaba Cloud on cybersecurity threats and information sharing -- and won't even consider partnering up with Alibaba again for at least six months.

Now admittedly, Alibaba Cloud is not the biggest part of Alibaba's business. In fact, according to data from S&P Global Market Intelligence, cloud computing represents less than 8.5% of Alibaba's annual revenue, and is currently a money-losing business for the company. That being said, cloud computing was a central part of CLSA's argument for why Alibaba stock could double yesterday -- and presumably a big part of the reason why Alibaba stock ran higher on CLSA's report.

If that cloud business is now in trouble, then it makes total sense that Alibaba stock should be going down today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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