Alibaba (BABA Stock) tumbles below $200 on Chinese crackdown, ahead of earnings

Alibaba is reporting its June Quarter results this Tuesday 03 August, in one of the most anticipated announcements of the week.

Update August 3: Alibaba (NYSE: BABA) has kicked off Tuesday's trading session with a drop of 2.54% to $195, a loss of over $5. Traders are anxious amid the Chinese techlash, which has extended its wing toward gaming companies. An editorial said that playing games is akin to "spiritual opium." While that official opinion article was later taken down, so has the share price. The next big move depends on the firm's earnings, due out later in the day.

Alibaba’s announcement is hotly awaited due to several reasons, not least due to the turmoil surrounding the stocks of Chinese companies over the past two weeks. As has been widely reported, Chinese regulators have spooked investors and caused them to revaluate the risk status of Chinese equities or Chinese based companies.

Consequently, investors’ appetite for Chinese stocks has constricted, and stocks experienced a considerable sell-off. The new lower equity prices compensate for the premium that investors expect in response to the risk of investing in companies that can have the regulatory rug pulled from under them at the whim of a heavy-handed regularity/ government.

Alibaba was not immune from the recent slump in Chinese equities. BABA finished last week down 5.18%, but, to its credit, recovered from a 12.4% decline in stock price by Wednesday. An interesting note: in the past two months, BABA is making a habit of retracing by more than 50% after every significant descent.

Alibaba’s stock is down 6.36% since the last earnings report it delivered on 13 May 2021, and down 15.6% since the multi-month highs, it reached 28 June 2021 (intraday).

What to look forward to in this week’s earning report?

Alibaba bulls will be looking to break out of the channel the stock has traversed the past month and a half. Some significant factors present barriers to a breakout, but BABA is not without its positives, particularly related to the fundamentals of the business. If the fundamentals can overcome the obstacles, a share price above US$205 would be a confidence-inducing target, which could be an excellent start to a bullish run (and marks a 100% retracement from the last big dip).

Factors working against BABA

Chinese risk sentiment could worsen or competing emerging markets become more attractive

Further problems or fines from Chinese regulators

Positive results aren’t favourable enough (much like APPL, AMZN and FB from last week, where forecasted growth disappoints)

Alibaba and Cloud Computing

Beside the investments in its ecommerce platform paying off, investors will want to see Alibaba strengthen its position as the leader of the Chinese cloud service industry. As of 2021, the online giants foray into cloud computing has netted it ~7% of the global market share. However, Alibaba’s chance of usurping a great deal more of Microsoft or Amazons market share is unlikely. Moving forward, it will face more questions related to the security of its infrastructure and service from non-Chinese entities (much like Huawei and its bids for 5G contracts). This means, Alibaba’s global potential in the space is dubious but remains resilient in China. Although all is not lost, China’s SaaS industry is a minnow compared to the US (8x smaller) and thus has a much larger scope for growth than the US and other major economies.