What happened
Shares of Alibaba Group Holding (BABA 1.33%) were rising in early trading this morning, up as much as 6.4% before settling into a 5.9% gain as of 11:15 a.m. ET.
The gains seem to be due to a combination of two factors. One could be a mere "buying of the dip" after a down day yesterday, when speculation ran rampant that a large investor may be getting ready to sell Alibaba shares. Second, news on Tuesday indicated China's state-backed investment funds may be buying local shares, which could put a near-term floor under beaten-down Chinese stocks.
Image source: Getty Images.
So what
Yesterday, major investment bank Citigroup wrote that based on a recent U.S. Securities and Exchange Commission filing, Alibaba is registering 1 billion new shares that could be issued as American depositary shares, which trade on the New York Stock Exchange. The implication behind that is that either Alibaba is looking to issue employee stock-based compensation in U.S. ADSs, or that certain insiders are looking to sell a significant amount of shares that have never been registered with the SEC in the U.S.
One large Alibaba insider is technology holding company Softbank, which is a big investor across the global technology space, and which has come under pressure recently as the technology sector has sold off hard. The global tech sell-off could put pressure on Softbank to raise cash.
As an early investor in Alibaba, Softbank still owns nearly a quarter of Alibaba shares, so Alibaba stock could be one of the main options for Softbank to sell in order to raise cash. Of course, given that Alibaba stock is down more than 60% from its all-time highs, it would be distressing to see a large investor bailing out at these low levels.
So, Monday's move could merely be a bounce back from yesterday's fall. Some may see an opportunity if in fact Softbank is a true "forced seller." That would mean Softbank is selling for reasons other than Alibaba's fundamentals. Given that the stock trades at just 13 times next year's earnings estimates, some investors may see big time value in Alibaba's shares. Count Warren Buffett's partner Charlie Munger as one of them. And of course, the speculation around a Softbank sale is just that at this point: speculation.
In addition, Bloomberg reported today that Chinese state-backed funds stepped in to buy local stocks on the CSI 300 Index on Tuesday, helping that index bounce back from a 2.4% decline to end down just 0.6%.
Of course, Alibaba doesn't trade on the CSI 300, but rather in Hong Kong and the U.S. Still, seeing China's government step in to keep local shares from falling beyond a certain amount likely bolstered sentiment for all Chinese stocks. If the government will step in to buy stocks here, further near-term downside may be limited.
Now what
Remember when buying Chinese stocks, wherever they're listed, that the Chinese government can giveth, but can also taketh away. Alibaba certainly has seen that over the past year, as the government cracked down on its business, levying fines and forcing certain behaviors and divestitures to drive more competition. Hence why Alibaba is down so much -- even more than other large-cap rivals.
After a bad year for Chinese stocks and recently weak economic indicators in the country, China's central bank has pivoted to cutting rates when other central banks appear set to raise them. Now, it looks as though the government is taking further action to prop stocks up at these levels.
So for those who understand the risks, Chinese stocks in general may look like good values heading into 2022 after underperforming last year. Alibaba is certainly a candidate to outperform, but really the whole Chinese tech sector is much cheaper than it used to be. If you have a favorite -- whether it's Alibaba or another name -- now may be the time to go shopping.
