Alibaba Group Holding can avoid this potential issue

Even though one problem has been addressed for Alibaba Group Holding Limited (BABA) by U.S. and Chinese officials, it may take more than that to improve the stock.
CENTRAL, Hong Kong - Oct. 26, 2022 - PRLog -- In recent days, BABA's stock has benefitted from a massive relief rally. A tentative deal between the United States and China will allow U.S. auditors to conduct investigations into Chinese enterprises.

A transaction like this significantly minimizes the likelihood of the U.S. market delisting BABA shares. But does this make it worthwhile to invest in the online and direct marketing retail stock?

With BABA and other Chinese equities, U.S. investors have encountered substantial obstacles. China prohibits U.S. investors from directly purchasing equity in a firm. To get around this regulation, investors use American depositary receipts (ADRs), which are bank-issued certificates that reflect a certain number of shares of a foreign firm.

Both sides profit from ADRs. They enable U.S. investors to invest in firms that would otherwise be inaccessible to them. Furthermore, these overseas firms enjoy better access to the U.S. capital markets.

BABA and other Chinese equities have been threatened with delisting. China had refused to allow U.S. regulators to examine Chinese enterprises, citing national security concerns.

This situation raises concerns about what a delisting entails for investors. While it would not wipe out BABA's investors, it would certainly shift the shares to the over-the-counter markets, reducing interest in the firm.

However, providing the deal is upheld, BABA can avoid this potential issue. As a result of this announcement, BABA's stock price increased by up to 20%.

On many levels, though, U.S. - China ties remain fraught. Visits to Taiwan by House Speaker Nancy Pelosi and other members of Congress have irritated Chinese officials. If such tensions continue to build, the ADR agreement and other elements of the U.S. - China relationship may suffer.

The corporation also reported poor financial results in the most recent quarter. Revenue of $31 billion in the second quarter increased by zero % year on year. The brightest light in terms of revenue was a 10% gain for Alibaba Cloud. However, with $2.6 billion in revenue, it accounts for only 9% of the company's total revenue.

Despite the news, experts estimate BABA will expand its sales by 4% this year and 12% in 2023. Nonetheless, BABA has lagged behind the S&P 500 (^GSPC), and while BABA has endured less of a decrease than Sea Limited (SE) in the recent year, it lacks the stock price stability of Inc. (AMZN).

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Susan Chua
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