The embattled stock of Alibaba Group Holdings (BABA 2.92%) hit more turbulence recently when the U.S. Securities & Exchange Commission listed the company as a potential candidate for delisting from the New York Stock Exchange.
Delisting is a big deal, but investors shouldn't panic. Here are the facts you need to know and what it means for the stock and its shareholders.
Why Alibaba is in hot water
Foreign companies that list on U.S. stock exchanges require auditing from the Public Company Accounting Oversight Board, which the Securities & Exchange Commission (SEC) oversees. This stems from a law passed in 2020 that aims to prevent foreign companies from falsifying information or other improper tactics.
A foreign company could face delisting if it fails to comply with the audit requirement for three consecutive years. The SEC recently included Alibaba and roughly 200 Chinese companies on a list of stocks that could face delisting due to this requirement. It's not the final straw, but it's a shot across the bow.
It's uncertain how things will move forward from here, but it's a reminder that relations between the U.S. and China are tense; Nancy Pelosi recently visited Taiwan, a move that angered China, which claims Taiwan as a territory of its own.
Alibaba has been listed on the New York Stock Exchange since 2014 but could become a pawn in this ongoing political standoff.
Delisting: What does it mean?
A company delists when it violates an exchange's rules and qualifications. Delisting isn't the death sentence it sounds like. Investors can still trade a stock on the over-the-counter (OTC) markets through their online brokerages even if it's not listed on major exchanges like the New York Stock Exchange or the Nasdaq Stock Market.
The drawback with OTC markets is that they can have looser reporting and oversight standards and can be more volatile than stocks listed on the major exchanges. Many penny stocks trade on OTC markets, but some notable companies do too, including fellow Chinese technology company Tencent Holdings.
How will this impact Alibaba?
Nobody can predict the future, but delisting would likely create more turbulence for the stock; the shares sold off on the news that the SEC had listed Alibaba for potential delisting.
But there's a fair argument that Wall Street has priced in much of the damage. Over the past two years, investors crippled the price-to-sales (P/S) ratio, pushing it down more than 80% from 10 to less than 2.
BABA PS Ratio data by YCharts.
The stock is trading at its lowest valuation since listing in the U.S. The business is still growing profits; analysts expect earnings-per-share (EPS) growth to average 9% annually over the next three to five years.
Delisting won't impact Alibaba's business; the company will still operate the same regardless of where its shares trade. The added volatility of trading on the OTC markets isn't for everyone, but if it comes to that point, Alibaba can still be a good investment for investors willing to take on the risk.
