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Why Shares of Alibaba, Nio, and New Oriental Education & Technology Group Are Falling Today

By Bram Berkowitz – Jun 16, 2022 at 1:40PM

Key Points

  • Tech stocks all over are not reacting positively to recent rate hikes.
  • Investors are also still concerned about future lockdowns in China due to COVID-19.
  • Chinese tech stocks have been significantly beaten down, but may present an opportunity amid difficult market conditions.

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Several Chinese stocks fell along with the broader markets.

What happened

Several prominent Chinese stocks trading on U.S. exchanges fell today along with the broader markets, especially as China continues to grapple with concerns related to COVID-19.

Shares of the e-commerce giant Alibaba (BABA 2.38%) traded nearly 6% down as of 1:38 p.m. ET today, shares of the electric vehicle maker Nio (NIO 0.25%) traded roughly 5% lower, and shares of the private tutoring company New Oriental Education & Technology Group (EDU 5.91%) had fallen 6%.

So what

Most stocks struggled after the Federal Reserve's rate-setting committee yesterday hiked its benchmark overnight lending rate, the federal funds rate, by a whopping 75 basis points (0.75%), as the Fed ramps up its efforts to tame high inflation. Other central banks are also now moving to raise rates. Tech companies in general become less attractive as rates rise because higher rates reduce the present value of their future cash flows. Additionally, higher rates make safer assets like U.S. Treasury bills yield more. 

China is also still dealing with the fallout of recent COVID-induced lockdowns in major cities, which lasted for months and have hurt economic growth in the country. While the Chinese government has started to ease restrictions, there have also been new outbreaks, which have led some to believe more lockdowns this year are not out of the question.

But despite concerns, analysts are starting to view Chinese stocks as a favorable play after a very tough year for the sector.

Sid Choraria, a portfolio manager at Gordian Capital, said he likes Alibaba at current levels, and believes that its current cash generation is the reason it is a value play right now.

"I mean, the cloud computing division is ... an $11 billion revenue business that I expect will be $25 billion revenue in three years' time," Choraria recently told CNBC. "Digitalization is not going away in China -- and that's a significant part of development."

Analysts are also growing increasingly bullish on Nio, despite a recent poor earnings report, after the company announced earlier this week that it is planning a new product rollout. Deutsche Bank analyst Edison Yu recently wrote in a research note that the company has resumed normal production after the end of lockdowns and other supply chain issues.

Yu said deliveries are recovering and could increase from 7,000 per month in May to 25,000 by the end of the year. Yu has assigned Nio a "Buy" rating and a $45 price target. The stock currently trades below $19 per share.

Now what

While the Chinese government takes COVID very seriously, it is also now very worried about hitting year-end economic growth targets, which should provide incentive for it to support businesses and the economy.

The Chinese government has also now voiced support for Chinese tech stocks, started working to end a decades-long auditing dispute with U.S. regulators, and is rumored to be considering ending investigations into several large Chinese tech companies including Didi Global.

I would agree with the analysts that Chinese stocks are starting to look attractive, but keep in mind that there could be more volatility ahead due to potential lockdowns.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio Inc. The Motley Fool recommends New Oriental Education & Technology Group. The Motley Fool has a disclosure policy.

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