What happened
Shares of Chinese e-commerce stocks rose sharply on Monday, with Alibaba Group Holding (BABA +4.02%) up 7%, JD.com (JD 0.45%) up 7.3%, and Pinduoduo (PDD +1.73%) up 7%, as of 1:40 ET.
These stocks rose not on any news about them specifically, but rather on news regarding other U.S.-listed Chinese stocks, as regulators in China indicated they would be concluding their regulatory crackdowns on other internet companies. That bodes well for these three, which are also large-cap Chinese internet companies that have been the targets of regulators, and which are listed in the U.S.
NYSE: BABA
Key Data Points
So what
This morning, The Wall Street Journal reported that Chinese authorities informed Didi Global (DIDI +2.34%) they would be lifting the ban on new users and reinstating Didi's app on domestic app stores, after it had been removed nearly one year ago. Didi is expected to pay a large fine.
Authorities also said they would be concluding similar investigations into logistics platform Full Truck Alliance (YMM +2.27%) and online recruitment platform Kanzhun (BZ +0.74%).
While these investigations didn't have to do with the aforementioned three e-commerce stocks directly, the developments bode well for any Chinese internet company that collects large volumes of user data and is listed on United States exchanges. In fact, the regulatory assault on China's tech companies began with Alibaba, after founder Jack Ma criticized the government's approach to the fintech sector back in October 2020.
Since then, China's technology giants have had to deal with an unending regulatory crackdown on their businesses, involving breaking up monopolies and duopolies, limits on consumption of things like video games, better pay for delivery drivers, price controls, and (of course) large fines. There is also talk of the Chinese government taking 1% stakes in Didi and other tech companies, and assuming direct oversight of business decisions.
For its part, Alibaba subsequently saw the initial public offering of its fintech arm Ant Financial delayed in late 2020, and the underlying Ant Financial company broken up in 2021. Alibaba also had to end certain exclusivity practices for its vendors, essentially giving competitors a more level playing field.
However, the Chinese economy has since deteriorated, after its property bubble burst last summer, and the government recently imposed lockdowns in Shanghai as part of its harsh zero-COVID policy in response to a recent outbreak. Lower growth and job losses appear to have led regulators to change course, easing up on regulations and pivoting to supporting the tech sector, rather than restraining it.
Moreover, Shanghai finally officially emerged from its two-month lockdown last week. The combination of the end of the regulatory campaign and the lockdowns were enough to send shares of these beaten-down Chinese stocks higher.
Image source: Getty Images.
Now what
Despite the nice gains today, Alibaba, JD.com, and Pinduoduo are all still far, far below their highs. So, are Chinese tech stocks a buy at their marked-down prices?
That's still a tricky question. While the government's adversarial posture might be ending, the two-year campaign has certainly reset things in the tech world. I wouldn't expect these companies to return to their pre-2021 growth anytime soon.
Alibaba's growth decelerated to just 9% last quarter, with its core high-margin "customer management" portion of its e-commerce platform posting flat results over the prior year. That's why adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) actually fell 30% over the prior year.
Pinduoduo's revenue growth was just 7% last quarter, after posting a 239% increase in the prior-year quarter, as the company has focused on profits, and not growth at all costs.
JD.com has been steadier, but did show a deceleration to 18% growth last quarter, down from 39% a year ago.
Therefore, it could be a while before these companies make new highs. Additionally, the actions of the Chinese government on the international stage, especially its alliance with Russia, have also thrown into question the risks for U.S. investors who own shares of Chinese stocks. There are lingering delisting concerns, trade and tariff worries, and geopolitical issues that aren't going away.
That doesn't mean these companies aren't worth an investment -- far from it. However, investors should probably discount these companies' earnings and growth expectations by a greater amount than U.S. stocks, given the higher uncertainty surrounding Chinese stocks today. You should also be careful about how much China exposure you have across your portfolio.
