Over the weekend, the Chinese e-commerce giant reached a $2.8 billion settlement with regulators, who have been investigating it for antitrust since last fall.
While a record amount, Wall Street analysts who follow the stock said it wouldn’t affect Alibaba’s financials and was “closure” for investors.
And then on Monday, Jack Ma’s Ant Group said it will apply to become a financial holding company and restructure its operations amid China’s regulatory crackdown on internet companies.
This comes after months of review and after Ant representatives were summoned to a meeting at the People’s Bank of China on Monday, according to The Wall Street Journal.
Shares of Alibaba (BABA) jumped more than 9% on Monday after word of the antitrust fine, which was less than feared. The shares are up 4% this year compared to a 9.7% gain in the S&P 500. They are having their strongest day since last July.
And though it’s a publicly ugly moment for Alibaba, the settlement does not dampen the secular trends of the last few years: Consumers continue to use e-commerce sites in greater numbers and merchants have adjusted their business to take advantage of that.
JPMorgan analyst Alex Yao reiterated an Overweight rating on Alibaba stock, with a $320 price target, implying a 32% gain from the current price.
“The event will serve as a closure of investors’ concern on Alibaba’s core commerce regulatory risks,” Yao wrote in a weekend note. “While Alibaba’s business practice will be altered and some merchants may begin to engage other ecommerce platforms more actively, our analysis suggests that the financial impact should be manageable.”
Truist analyst Youssef Squali, who rates the stock a Buy, said Alibaba can increase its revenue an average of 27% annually for the next three years, “putting it as one of the fastest growing and most profitable companies” he covers. Alibaba is still moving into smaller cities where the population is just starting to buy goods online.
Citigroup also called the stock a Buy, with a $338 price target. Alibaba waived its right to appeal the antitrust decision, notes Citi analyst Alicia Yap. That suggests “the company wanted to move forward to rebuilding its business operation,” she wrote.
“We believe with the latest development, together with recent earnings revision reset, it could help lift the overhang that has weighed on share price performance the last few months,” Yap added.
China’s State Administration for Market Regulation (SAMR) said Alibaba abused its leading position over its rivals and the merchants selling on its platforms. In addition to the fine, Alibaba has to revamp its operations and conduct a compliance self-exam. And it has to end exclusivity arrangements with merchants on its platforms.
The regulatory review has weighed on Alibaba’s outlook for months — sending its shares 24% lower than their all-time high in October — but that was not its only regulatory headache.
Fintech affiliate Ant Group has also been in hot water. People’s Bank said in a statement reported by WSJ on Monday that Ant had formed a “comprehensive, viable rectification plan” under regulatory supervision in the last few months.
The move could put a lid on Ant’s valuation months after it abandoned a $34 billion initial public offering in November, around the time regulators started turning up the heat on the companies. Ant will be regulated more like a bank under the new regime.
Wall Street analysts say the antitrust fine, just 4% of Alibaba’s 2019 sales, appears to be a turning point.
Alibaba management told analysts the fine would be folded into its upcoming March quarterly financials and that it does not expect a material effect from having to adjust its merchant relationships.
Mizuho Securities analyst James Lee, who also rates the shares a Buy, noted that Alibaba has $70 billion in cash and cash equivalents to pay out the fine.
The latest news should help Alibaba change course, where it is “competing from strength instead of weakness,” Lee wrote. “As competitive and regulatory concerns start to subside, we expect multiple expansion” for the core commerce business.