Alibaba Stock could have its worst day of 2022. Here are two reasons why.

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Alibaba stock has outperformed much of the tech sector so far in 2022.

Greg Baker/AFP via Getty Images


Ali Baba

The stock is set to suffer one of the biggest falls of the year on Tuesday as investors face pressure on multiple fronts.

Shares of Alibaba (ticker: BABA) fell 4.5% in premarket trade in the United States. It is on track for one of the biggest one-day declines of the year, on par with the poor performance on January 13, when Chinese economic concerns took center stage and the stock fell 4.4%.

The Chinese tech giant was underperforming its peers as


JD.com

(JD) on Tuesday, which was down 3% in the pre-market, as well as the broader tech sector.


Nasdaq-100

futures, which track the biggest stocks in the tech sector


Nasdaq Compound,

pointed to a 1.5% open decline.

There are likely a number of factors behind Alibaba’s latest crisis.

On the one hand, investors can blame familiar concerns: high inflation, expectations of interest rate hikes and tighter monetary policy from the Federal Reserve, and a significant rise in bond yields. These factors are all contributing to a selloff in tech stocks on Tuesday, especially bond yields.

The yield on the benchmark 10-year US Treasury note is at the highest level since January 2020, touching 1.84% on Tuesday. The valuations of many high-growth companies in the technology sector are based on the prospect of earnings many years in the future, and higher bond yields generally discount the present value of future cash.

But bond yields have been rising all year: the 10-year rate started 2022 at 1.53%. While the rise in yields has been accompanied by a decline in tech stocks in general – the Nasdaq-100 is down nearly 6% so far this year – that hasn’t necessarily been the case for Alibaba. . The title is up more than 9% over the same period.

Dip-buying was a major factor in the recent surge as investors capitalized on a stock that looked relatively cheap after a brutal 12 months. Alibaba lost nearly 50% of its market value in 2021 amid slowing sales growth and, more importantly, regulatory concerns. Analysts recently said the worst is over and the regulatory picture is clearing up.

The macro factors hitting tech broadly on Tuesday are no doubt also playing into Alibaba’s price action. But the stock’s underperformance suggests there could be more to it. New and unexpected regulatory review reports could be to blame.

According to a Reuters report that cites three unnamed sources, the White House is investigating Alibaba’s cloud activity as a potential national security risk to the United States. The investigation focuses on how Alibaba stores US customer data and whether the Chinese government has access to it, according to the report.

If the report is true, it would be bad for two different reasons.

First, it would signal that Alibaba continues to face significant concerns from regulators and that the review fog is not lifting as quickly as expected.

Second, it would pose a real threat to Alibaba’s cloud business, which has been a source of recent growth and an area that some analysts say is significantly undervalued. It’s also a particularly targeted division of the company, not least because Chinese consumer spending, tied to the core of e-commerce business, has slowed.

About Dianne Stinson

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