Alibaba Stock Recovers on Tuesday

Shares of Alibaba (BABA) rallied on Tuesday following a sharp drop the previous day. After the Chinese tech giant filed to register a billion American depositary shares, speculation regarding the firm’s intentions may have spooked traders.

Selloff Fears Push Alibaba Down

Alibaba has experienced quite a few ups and downs over the past year. The company has had to grapple with increasing Chinese regulation of the country’s home-grown tech industry, the continued effects of the COVID-19 pandemic on international commerce, as well as CEO Jack Ma avoiding public appearances for three months following controversial statements regarding his country’s banking industry. However, its latest drop was due to another reason. On Monday, the firm’s share price dropped by just under 6% over the course of the trading day.

This dramatic fall could have been due to Alibaba’s recent filing with the U.S.’ Securities and Exchange Commission (SEC) to register one billion American depositary shares (ADS’s). ADS’s are equity shares of non-American companies held by U.S. banks which allow trading in the United States. They also allow shareholders whose equity in the company has not been registered with the SEC to sell stock.

After analysts from Citigroup (C) speculated that the registration of these American depositary shares could signify a coming sell-off by large stakeholders, it was off to the races. JPMorgan (JPM) analysts advised their clients that a major unloading of SoftBank-held shares could be on the cards.

SoftBank owns a stake of nearly 25% in Alibaba and has been one of their primary investors since before the firm floated its first IPO in 2014. Given its early buy-in to Alibaba’s potential, analysts believe that much of the stock SoftBank (9984.TY) holds in the Chinese conglomerate may not be officially registered, and can only be sold following ADS registration.

Financial pressures on the Japanese conglomerate have also been mounting recently due to the declining fortunes of many tech companies in which SoftBank holds equity, such as Doordash (DASH). Furthermore, the potential cancellation of SoftBank subsidiary Arm’s acquisition by NVIDIA (NVDA) could have the Tokyo firm on the hook for $1.25 billion in ‘break-up fees’.

Accordingly, sharp-eyed market watchers made the correlation between Alibaba’s SEC filing and the 5.39 billion shares owned by SoftBank, positing that the latter could offload a portion of its equity in order to fund stock buybacks. SoftBank’s equity of $82 billion in Alibaba is worth even more than SoftBank’s own market cap of $80 billion. These speculations could have been the proximate cause for Monday’s drop in Alibaba’s share value.

SoftBank’s Denial Leads to Recovery

However, Alibaba’s Monday fall was followed by an impressive rally on Tuesday. The founder of SoftBank, Masayoshi Son, denied analyst allegations that the company was gearing up for a selloff of its 24.8% stake in Alibaba, and in tandem, the shares of the latter rose by 6.1% over the course of the trading day. SoftBank shares rose over the course of the trading day in Asia on Wednesday by 5.6% as well, with traders perhaps encouraged that the company was in less dire financial straits than speculated.

Despite yesterday’s encouraging rally, Alibaba shares are still more than 61% below their high point of $317 per share, reached in late October of 2020. Continued uncertainty regarding the Chinese Communist Party’s future direction with regard to tech regulations may still have traders wary of Alibaba’s prospects for continued growth, and it remains unclear whether the Asian giant will climb back up to its former peak. 

Clearly, recent times have been far from simple for tech companies, especially in Asia. This week's rises and falls in Alibaba’s share price may indicate that uncertainty is far from over.