Alibaba Stock Bulls Shouldn’t Sweat Delisting

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Alibaba (NYSE:BABA) stock investors just can’t seem to catch a break. Between the trade war, the novel coronavirus and now fears over a potential U.S. delisting, the stock has been bombarded with negative headlines over and over.

Source: Kevin Chen Photography / Shutterstock.com

None of these headlines have anything directly to do with the company or its business. And it’s likely none of them will ultimately have any impact on the company’s long-term valuation.

The Holding Foreign Companies Accountable Act requires all companies listed on U.S. exchanges to certify “they are not owned or controlled by a foreign government.” In addition, these companies would be delisted if their auditors aren’t certified by the Public Company Accounting Oversight Board after three consecutive years of inspection. And the bill specifies that companies can’t simply delist from the Nasdaq or the NYSE and trade on the OTC market as a loophole.

I am a Alibaba stock investor. I will also be the first to admit that the company most certainly operates under the influence of the Chinese government. But I don’t see a potential U.S. delisting as a problem for several reasons.

Delisting Alibaba Stock Is Likely a Bluff

It’s election year. There’s a lot of anger in the world about Covid-19. Some people argue that China is rightfully to blame for allowing conditions in wet markets that are conducive to viral mutations. Others argue that blaming Chinese culture for the virus is judgmental and even racist. But between the virus, the trade war, and fraudulent U.S.-listed Chinese companies like Luckin Coffee (NASDAQ:LK), there’s a lot of hostility toward China these days among U.S. voters.

In other words, going after Chinese stocks is low-hanging fruit for politicians. Passing some financial crackdown law on Chinese companies is an easy way for politicians to appear “tough on China,” whatever that means. Meanwhile, I doubt even President Donald Trump actually cares about protecting investors. I think he cares about winning the trade war, and this crackdown is his latest leverage.

Delisting May Be Difficult

Let’s assume Congress passes the bill and regulators actually attempt to enforce it. It may be more difficult to gain access to Alibaba’s accounting than it seems. Americans actually own shares of Alibaba Group Holding Corp, not Alibaba itself. Alibaba stock represents shares of a variable interest entity (VIE) that is headquartered in the Cayman Islands, not China. So the VIE is listed in the U.S., not Alibaba itself. See what I’m getting at?

I’m sure the company has made sure the VIE’s accounting as clean as a whistle. I’m not a lawyer or an accountant. But I could easily see how trying to access the company’s accounting through the VIE could be difficult. It might even be virtually impossible.

Alibaba launched a dual listing in Hong Kong just last year. That gives the company flexibility that other Chinese companies may not have.

For example, if U.S. regulators ultimately delist Alibaba stock, it won’t happen overnight. Investors may simply be able to transfer their shares to a U.S. broker that allows trading in Hong Kong stocks and covert to Hong Kong shares. They may also receive cash for their shares for a valuation roughly in-line with the company’s Hong Kong valuation.

Alibaba May Simply Comply

But potentially the most likely outcome is that nothing at all happens to Alibaba stock. Alibaba CFO Maggie Wu recently told investors that the company has been an SEC filer since 2014. She said the company stands behind the integrity of its accounting.

“Alibaba’s financial statements are prepared in accordance with U.S. GAAP and since our inception in 1999, we have been audited by PwC Hong Kong, PwC Hong Kong is the local affiliate of the worldwide PwC’s firm, and its auditing standards are overseen by the PwC national office in the United States,” Wu said.

In fact, the company was reportedly investigated by the SEC back in 2016 for its accounting practices. Nothing major seemed to come to light as a result of that investigation.

U.S. investors seem to assume all Chinese numbers are illegitimate. But if the company actually does want to comply and remain listed in the U.S., maybe the new law will finally help eliminate much of the valuation gap between it and Amazon.com (NASDAQ:AMZN).

The delisting news has rattled Alibaba stock, even though the company keeps putting up one impressive quarter after another. Traders should expect more weakness in the near term until the market gets more clarity about the situation.

However, at this point, the new compliance requirements could easily turn out to be as much of a blessing as a curse for Alibaba stock in the long term.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long BABA.

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