Worst Over for Alibaba Stock? Here’s What Reddit, Hedge Funds Say

Recently, Alibaba (BABA) stock hit its 52-week low amid the sell-off in Chinese tech stocks. While it has come off the lows, it's still down almost 30 percent in 2021. Many investors wonder if the worst is over for Chinese stocks like BABA. Should investors buy or sell now? Here’s what Reddit traders and hedge funds think.

BABA stock has been under pressure since 2020 when China went after the tech giant. The company agreed to pay a $2.8 billion fine to settle the antitrust case and it seemed like the company's troubles with the authorities were over.

Cracking down on alleged monopolies wasn’t the sole aim of Chinese authorities. As is visible in the crackdown, the country is trying to enforce a new economic order and has shifted towards the left. China has raised concerns ranging from national security, wealth disparity, social cohesion, and economic stability to target its tech giants.

It might be hard to imagine why China went after tech giants—some of which have been part of its soft power globally. But then, when the ultimate aim of the government is to project and strengthen its authority, a fall in stock prices can take the back seat.

China is investigating senior government officials in Hangzhou—the city where Alibaba and Ant Financial are based. According to a Bloomberg report, social media accounts in China talked about Hangzhou Municipal Party Committee Secretary Zhou Jiangyong buying a stake in an unlisted fintech company.

While the name wasn’t specified, it’s an apparent reference to Ant Financial whose IPO was stalled last year by the Chinese authorities. Ant has denied the rumors that some entities purchased shares before the IPO process.

Now, there hasn’t been any major crackdown by China recently, which has left us with an air of uncertainty. What we know for sure is that the deteriorating valuation multiples for Chinese companies like BABA are structural.

Many Reddit traders are bullish on BABA stock. A WallStreetBets member StockAstro with over 7,000 comments karma said that they have bought Alibaba shares. The member doesn't think that China will go too far and cut itself off from the global capital markets.

Another user by the name BobandSteve said that such arguments have been made in the past also but BABA stock kept falling. The user also referred to Charlie Munger holding the stock, which hasn’t helped prevent the slide in Alibaba. Meanwhile, China’s tech crackdown is weighing heavy on the otherwise positive forecast for BABA stock.

Many WallStreetBets members also talked about a possible delisting for Chinese names like BABA. While delisting might hurt, U.S. investors can convert their shares into Hong Kong shares thanks to a dual listing of Alibaba.

While some fund managers like Cathie Wood of ARK Invest have been selling BABA stock, others have been buying as well. According to the data from WhaleWisdom, the 13F filings for the second quarter of 2021 revealed that 1,816 hedge funds own BABA stock, which is similar to the 1,825 funds that held the Chinese tech stock in the first quarter.

However, in absolute terms, the hedge fund holding of BABA shares has come down by 26 percent. Only about 24 percent of the company is held by hedge funds compared to 32.8 percent at the end of the first quarter. In the second quarter, 199 hedge funds opened a new position in BABA stock and 165 closed it. Meanwhile, 754 hedge funds increased their positions in the stock while 600 lowered the exposure.

Overall, the argument on whether to buy or sell BABA stock would depend on your perception of the tech crackdown. If you think that China won’t go too far in targeting Chinese tech stocks, BABA looks like a compelling buy. If you think that the country isn't done with the crackdown yet, you might want to stay away from Chinese shares for now.

BABA and other Chinese stocks are higher in premarket on Aug. 23 after JD.com said in its earnings call that the steps taken by the Chinese government will help promote sustainable long-term growth in the country's internet economy.