Alibaba stock surges after record $2.8 fine from Chinese regulators

On Apr. 9, Chinese regulators fined Alibaba $2.8b for its anti-competitive business practices (i.e. forcing merchants to sell exclusively on Alibaba). Investors were relieved to see investigations on its business coming to an end — sending Alibaba stock up over 9%.

The third series in a trilogy is almost always the worst — but this time, Alibaba’s managed to break the rule.

Alibaba saga — the finale(?)

The fines on Alibaba, the largest e-commerce company in China, comes after a months-long antitrust investigation — which kept its stock down over the past 6 months. Here’s how It all started:

• Nov. 2020 — Ant Group’s (33% owned by Alibaba) mega IPO was postponed after Ant Group’s founder, Jack Ma, criticized China’s politically connected financial institutions.
• Dec. 2020 — China launched an antitrust investigation into Alibaba for abusing market its market dominance.

Any news is better than no news for Alibaba stock

Despite the fine, Alibaba stock jumped for two likely reasons:

• Analysts expected a higher fine which only turned out to be 4% of its sales, lower than the 10% of the maximum allowed under Chinese law.
• Investors are relieved that the antitrust case is coming to an end and there’s more clarity to Alibaba’s business moving forward.

But according to FT, the worst is far from over… Alibaba’s bigger challenge will be fending off competitors:

• Pinduoduo’s ($PDD) total number of online shoppers reached 788m in 2020, outpacing Alibaba’s 778m.
• Meituan ($MPNGF), China’s DoorDash, is aggressively going after Alibaba’s food delivery service.

For investors… On to the next problem

The result of the antitrust case could have several long-term implications on Alibaba’s future growth and profitability:

• More scrutiny on future acquisitions — which will limit Alibaba’s ability to grow by acquiring competitors.
• Mandatory changes on Alibaba’s business — i.e. lower merchant fees and more reporting requirements.

But there’s still uncertainty remaining — the future of Ant Group. In addition to Alibaba, Chinese regulators also went after Ant Group. Alibaba’s stake would have been worth over $100b upon Ant Group’s anticipated IPO. Since China halted the IPO, the value of Alibaba’s investment has fallen by nearly a third.

Ant Group is also going through a restructuring that will turn it into a financial holding company overseen by China’s central bank — a change that will significantly limit its growth potential and also the value of Alibaba’s stake in the business.

Learn more: Chinese tech firms are still under regulatory threats and these are the risks.