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Bear Of The Day: Alibaba (BABA)

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I chose Alibaba (BABA - Free Report) as a bear solely on its geopolitical risk, which has grown seemingly every day since Jack Ma's criticism of China's financial system. BABA has been trading at a significant discount to its US rival, Amazon (AMZN - Free Report) , and the reasoning behind this markdown is becoming increasingly clear. Think of this piece as more of a warning about a mounting threat than a sell everything red flag.

Analysts have been dropping their EPS estimates on BABA since its fintech subsidiary, Ant Group, was forced to suspend its IPO by Xi and his increasingly autocratic communist administration, pushing BABA down to a Zacks Rank #5 (Strong Sell). Alibaba has a 33% stake in Ant Group, which was expected to go public in the US at nearly half a trillion-dollar valuation earlier this year.

Xi's regime wiped out $100 billion in market value from this fintech titan, with a fresh regulatory overhaul aimed at Ant Group's unique lending methods. This move by Chinese officials was ostensibly a retaliation by the administration to Jack Ma's (founder and owner of the business) public criticism of the State. Jack Ma's denouncement of China's financial practices seems to have triggered this fresh wave of tech regulation in the region. Xi fears that he could lose control of his economy to ostentatious billionaires like Ma (the man who founded both Alibaba & Ant Group), or worse, US investors.

China Gives US Investors One More Reason To Worry

ByteDance, the owner of TikTok, an increasingly popular social media platform for short-form videos, is now putting its highly anticipated US listing on indefinite hold following local government officials in China voicing concerns about its data security. This appears to be just another move by Xi's communist administration to show its tech giants who's really in charge. The only problem is that every restriction deteriorates the value and growth potential of China's fast-growing tech players.

US investors have been shedding Chinese equities like my golden shed's hair (tons) as the spreading regulatory overhang pushes China's tech giants out of market favor. In the first couple weeks of July trading, $1.2 billion has flown out of Chinese stocks, compared to the $8.1 billion inflow over the same period last year.

The progressing Chinese communist regime seemingly headed towards capitalism is now reeling back towards what looks like a government-controlled autocratic economy. I don't think China wants US investors to have any stake in its country's tech giants.

Just 2 days after DiDi (DIDI - Free Report) , the Uber (UBER - Free Report) of China, released its shares to US investors, the Cyberspace Administration in China announced a data-security review of the company that would require them to temporarily halt user growth. DIDI shares have since lost 27.5% of their value. In fact, every publicly traded Chinese tech stock has taken a sizable dip since this announcement.

There is geopolitical risk in every foreign entity, but it would appear that China tech shares may hold the most at the lofty valuations many of them still trade at. Since this wave of regulation was catalyzed by Jack Ma, founder of Alibaba, I see significant risk in these shares specifically, though there is a value argument to be made for BABA at these levels.

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