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Alibaba shares slide amid China’s monopoly probe

Yahoo Finance’s Emily McCormick breaks down how Alibaba is faring on Thursday.

Video Transcript

JULIE HYMAN: We want to talk about Alibaba this morning because those shares are sharply lower in premarket trading. It looks like there is a new antitrust investigation occurring in China. Our Emily McCormick is here to tell us about what is going on there. There's really been increasing scrutiny that's been ratcheting up this year.

EMILY MCCORMICK: That's right, Julie. And we are now seeing a more concerted effort from Chinese regulators to rein in the sprawling e-commerce and fintech empires of Alibaba and Ant Group. Now, on this news from today, we have Beijing State Administration for Market Regulation saying that it's launched an antitrust investigation into Alibaba.

And other regulators also called a meeting with Ant Group to push the company to implement new financial regulations. And the connection between these two companies, of course, is that Alibaba does own an about 33% stake in Ant Group. Now, with the antitrust probe into Alibaba, regulators are focusing on reports that the company had pressured merchants into committing to selling goods on its platform alone and not turning to other competitors.

And then with Ant Group, the focus of that probe is on Alipay according to the "Wall Street Journal." And regulators are reportedly concerned about whether Alipay has resorted to monopolistic and anti-competitive behavior in order to maintain its massive base. And to be sure, Alipay is absolutely massive, especially in mainland China.

It has more than 1 billion global users, and it processed about $18 trillion in mainland China in the year to the end of June. Now, this is all coming, of course, just over a month after Beijing also halted Ant Group's IPO and specifically that dual listing for Hong Kong and Shanghai, which had been set to be the world's largest IPO, valued at about $34.5 billion.

So all of this is being interpreted as moves by Beijing to try and really clamp down on their largest tech giants viewed as perhaps growing a bit too quickly and disrupting society as a result. Now, the last thing I want to highlight here is what some Wall Street analysts are saying about these probes. Aaron Kessler of Raymond James in particular wrote in a note this morning that he isn't necessarily too concerned just yet if you are an Alibaba shareholder.

He wrote, quote, "we believe the most likely outcome is the termination of these exclusive relationships, though it is difficult at this time to quantify the potential revenue impact." And he does have a strong buy rating on the stock. Now, all that said, we are seeing shares of Alibaba, those American depository receipts down about 10% in premarket trading. So there is a little bit of concern here around this increased scrutiny. Julie and Brian.

JULIE HYMAN: Thanks so much, Emily. Our Emily McCormick there. And Brian, just to pick up on this discussion. I mean, to me, one of the biggest questions surrounding this whole situation is where is Jack Ma, right? He hasn't been seen in public since October 24. That's when he gave a speech that was critical of financial regulators.

He said they were stifling innovation. He hasn't-- again, he has not been seen in public since then. And it's really interesting. I mean, here in the US, of course, there's antitrust scrutiny of our tech giants. And here, of course, there's also a little bleed through between the politics and the actual antitrust violations.

There, it's even thornier to try to tease out how much of this is happening because the Chinese authorities are upset personally with Jack Ma and how much is it because the company poses any kind of real [? antitrust, ?] kind of, threat. And I don't know if it's possible to even separate the two here.

BRIAN SOZZI: Yeah, Julie, and I think it underscores really the risk for US investors for continuing to invest in a company like Alibaba. Now, it's a company I've watched really grow significantly over the past five years. The stock has generally done well. But you talk to a lot of analysts on the Street, you talk to a lot of retail investors that are invested in Alibaba, and it's still very much a hard to understand company.

I've talked to a few folks who've said it's like a black box. But the results have been so strong it's been hard not to play the stock. But I do want to highlight the two key words out of what Emily perhaps just said. Strong buy rating. You look at the analyst coverage, the Wall Street analyst coverage out there on Alibaba. 64 analysts cover this company.

Some of the highest amounts of coverage out of any stock that I follow out there. That's really big. Normally, you get about 20, 30 analysts following a widely covered company, let's say, like a Walmart. 62 of those 64 analysts rate Alibaba shares a buy. You have two holds and 0 sells. So if these regulatory matters really continue to increase, you have to wonder, at one point, does the Street take a step back, reassess their for earnings estimates and issue downgrades on the stock?

It has not happened yet, but it certainly could because you have a very, very bullish Wall Street community on Alibaba.

JULIE HYMAN: You do. And that perhaps leaves Alibaba somewhat vulnerable to the kind of pullback that we're seeing today, right? I mean, the drop that we're seeing in Alibaba shares today is nothing even approaching what we have seen for the US tech giants when they came under antitrust scrutiny, right? They barely budged.

And clearly, it's a very different situation. In China, you don't have to get the approval of Congress, you just pretty much have to get one guy to give the word if you're going to do some kind of antitrust regulation. The Ant Financial situation obviously also a big risk for investors, right, because that IPO got pulled by financial regulators there.

So that's something to consider as well when you're talking about these investment risks that you're pointing out, Brian. Just-- we were looking at the year-to-date chart just a few moments ago and just wanted to put a fine point on what we have seen there because the shares are still up about 21% year-to-date. But that pullback that we have had since Jack Ma's speech, basically, that's went-- kind of marked the turning point for the stock and then the subsequent Ant Financial situation. We've seen it pull back from a high of about $317 or so to where it stands today at 256.