Chinese stocks like e-commerce giant Alibaba (BABA) looked great to investors for quite a while. BABA had a massive market to pursue and at least some government support to help if things turned sour. Then, the very real potential of delisting emerged. That left overseas investors like those in the U.S. skittish about further investment.
However, recent developments gave Chinese stocks new life in trading on Monday thanks to a potential move that could defuse the risk. Specifically, China offered a proposal to U.S. regulators that would allow for access to most Chinese stocks' auditing reports. The latest word noted that U.S. regulators would have access to "the majority of the 200-plus companies listed in New York" and that access would be available by the middle of this year.
Pinning Hopes on a Long Shot
Alibaba recovered substantially as a result of the Chinese proposal. It wasn't the only one, either; JD.com (JD), Netease (NTES), and Tencent Music (TME) are all seeing gains today as a result of the proposal.
There's a problem with such a perspective, however. If the proposal falls through, then so too does the recovery. If U.S. regulators decide for whatever reason that the proposal is unacceptable, then we're right back where we started from.
The idea that regulators will allow any of their requirements to be blunted in any particular way is also something of a long shot. There may be some wiggle room, but it's hard to imagine that regulators will settle for "most."
Meanwhile, there are other points that could hamstring Alibaba that have little to do with the threat of delisting from U.S. exchanges. The biggest of these is a recession in China. Alibaba depends heavily on its market—Chinese citizens—having disposable income they can use to shop.
Food prices are spiking throughout China; indeed, throughout much of the world. Inflation was at a 41-year high just in March. Disposable income may be hard to come by going forward. It's easy to see that most Chinese citizens won't be interested in buying new furniture or the like when they're paying more for food.
Meanwhile, even the U.S. is seeing signs of potential stagflation to come, according to investor Ray Dalio. Plus, with China shuttering parts of Shanghai in response to new potential COVID-19 threats, that's going to hamstring supply chains still further and potentially leave Alibaba all dressed up with nothing to sell.
So even if regulators take the Chinese proposal for providing access to at least some records seriously, that's still going to leave a lot of potential failure points in play for Alibaba.
Wall Street's Take
Turning to Wall Street, Alibaba has a Strong Buy consensus rating. That's based on 17 Buys and one Sell assigned in the past three months. The average Alibaba price target of $169.76 implies ~45% upside potential. Analyst price targets range from a low of $65 per share to a high of $235 per share.
Concluding Views
Granted, it's not all disaster ahead for Alibaba. The company is off its lows for the year, but still well under its average price target.
Still, most of the Chinese companies listed on the U.S. exchanges tend to rely heavily on disposable income. That's a commodity that may be in shorter supply than any part of the supply chain soon. That prospect, coupled with the still-real potential of delisting, leaves me quietly neutral on Alibaba, among others.
To find good ideas for stocks trading at attractive valuations, visit TipRanks' Best Stocks to Buy, a newly launched tool that unites all of TipRanks' equity insights.
Read full Disclaimer & Disclosure
Chinese stocks were in the green on Friday after there were signals that an audit dispute between Chinese regulatory authorities and the U.S. Securities and Exchange Commission (SEC) could be resolved amicably.
According to a CNBC report, the dispute arose after the SEC passed the Holding Foreign Companies Accountable Act in 2020. This Act allows the SEC to delist Chinese companies from U.S. stock exchanges if these companies fail to allow American regulators to review company audits for the past three consecutive years.
The China Securities Regulatory Commission stated to CNBC Friday that it had called a meeting with “some accounting firms and told them to consider preparing for joint inspections.”
CNBC cited a statement from the U.S. Public Company Accounting Oversight Board (PCAOB), “We continue to meet and engage with PRC authorities in an effort to achieve a cooperative agreement that provides the PCAOB with the access required to inspect and investigate completely auditors headquartered in mainland China and Hong Kong.”
Following the news, shares of Alibaba and Baidu rose 1.33% and 6.5%, respectively on Friday. The question remains, will this reversal in price action continue for these two companies?
Using the TipRanks stock comparison tool, let us compare Alibaba and Baidu and see how Wall Street analysts feel about these stocks.
Alibaba Group (NYSE: BABA)After hitting a low of $73.28 in March, the stock has since recovered and is currently hovering around the $110 mark. Shares of BABA have tanked 51.1% in the past year as the company has faced significant headwinds. This includes a deceleration in China’s Gross Domestic Product (GDP) and total retail sales, the resurgence of COVID, soaring prices of raw materials, and rising competition for Alibaba’s ecommerce segment.
It is these headwinds for the stock that have led JPMorgan analyst Alex Yao “to turn more cautious on the company’s near- to mid-term business outlook.”
Elaborating further, the analyst pointed out that the company’s commerce business was under rising pressure as there was “prolonged consumption weakness” due to the pandemic and “potentially more social responsibility associated with the government's 'common prosperity' push.”
Yao is referring to China’s signature program called “common prosperity” that looked at redistributing equally China’s prosperity and included aspects such as cracking down on large Chinese technology companies. According to a Wall Street Journal report, this was because these firms were seen as “exploiting their market power to boost profits.”
Another upside risk for the stock from the analyst’s viewpoint is the faster-than-expected narrowing sequential losses for BABA’s Taobao Deal and Taocaicai over the next few quarters “as the company has already started to pull back investment and optimize operations.”
Yao added that these headwinds could result in Alibaba continuing to face “stock selling pressure in the near term” and rising macro and geopolitical risks could result in many global investors reducing their “exposure to the China Internet sector, leading to significant fund outflows from the sector.”
As a result, the analyst has downgraded the stock from a Buy to a Sell and lowered the price target from $180 to $65, implying a downside potential of 41% to early morning trading levels on Monday. Yao’s price target is the lowest on the Street and the downside potential suggests that the stock has already shot this valuation.
In contrast, Goldman Sachs analyst Piyush Mubayi is bullish on the stock with a Buy rating and a price target of $185, implying an upside potential of 67.8% to pre-market trading levels on Monday. Mubayi approved of BABA’s “record-high share buyback” that will result in ramping up its share buyback plan to $25 billion from $15 billion.
Mubayi added that this share buyback could “help optimize its balance sheet and better aligns the interests of management and shareholders.”
Other analysts on Wall Street echo Mubayi and are bullish on the stock with a Strong Buy consensus rating based on 17 Buys and one Sell. The average BABA stock prediction is $169.76, implying 54.1% upside potential to early morning trading levels on Monday.
Baidu (NASDAQ: BIDU)Shares of Baidu, a Chinese artificial intelligence (AI) company have tanked 36.6% in the past year even as the company’s underlying business fundamentals remain strong. The decline in shares has been due to a number of factors, including macro headwinds and rising regulatory scrutiny.
Mizuho Securities analyst James Lee firmly believes that BIDU will be able to brush these difficulties aside. The analyst pointed out some key positives for the stock amid dense headwinds in his research report late last month.
According to Lee, while the rising COVID cases could impact the company’s advertising revenue growth, the analyst approved of BIDU’s ways to “streamline its operations and optimize its cost structure.”
The top-rated analyst anticipates that BIDU’s growth in advertising revenues will decelerate by 8% year-over-year in the first quarter of FY22 followed by a 2% year-over-year decline in Q2.
It is important here to note that in 2021, Baidu saw strong growth coming from its non-advertising business. Baidu is not just a Chinese search engine but has other projects like its cloud business and its autonomous vehicle program.
When it comes to the company’s cloud business, Lee anticipates that as the Chinese government pushes for the digital transformation of its public sector, it could “allow Baidu to gain market share” due to high barriers to entry as Baidu is “one of only four approved vendors.”
Lee is also optimistic about the company’s autonomous driving technology and perceives multiple opportunities there. The analyst is of the view that BIDU will continue to sign up “more OEMs [original equipment manufacturers] for its Apollo self-driving technology.”
What’s more, the analyst perceives a substantial total addressable market (TAM) for autonomous driving technology as there are “270m passenger cars in China, and a goal of 70% of new cars sold with semiautonomous driving features by 2030.”
As a result, the analyst is bullish with a Buy rating and a Street high price target of $300 on the stock, implying an upside potential of 112.8% to early morning trading levels on Monday.
Other analysts on Wall Street are cautiously optimistic about the stock with a Moderate Buy consensus rating based on seven Buys, one Hold, and one Sell. The average BIDU stock prediction is $220, implying 56.1% upside potential to early morning trading levels on Monday.
Bottom LineWhile analysts are bullish about BABA, they are cautiously optimistic about BIDU. While there is not a lot of difference between the two stocks when it comes to upside potential over the next 12 months, It certainly seems that BABA is better equipped to handle macroeconomic challenges.
Download the TipRanks mobile app now.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure.