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Luckin Coffee Inc. (NASDAQ: LK) shares sank 94% after the company received a delisting notice from the NASDAQ. Now, several other Chinese companies could be delisted as well. Alibaba Group Holding Ltd. (NYSE: BABA) is among them.
Will Alibaba be delisted? Here's what we know...
Luckin was China's answer to Starbucks Corp. (NASDAQ: SBUX). The stock soared 177% on hype from November to January, less than a year after IPO. But the company fraudulently reported $130 million in sales on a recent quarterly report.
That led to a delisting from the NASDAQ and plummeting of the stock.
U.S. executive and legislative branches have been railing against shoddy financial practices by China through the last year's trade war. A combination of the coronavirus pandemic and China's Hong Kong policy have added fuel to the fire in the last couple of weeks.
The U.S. Senate passed a bill that would delist companies unable to verify that they are not under the control of a foreign government. This has prompted many investors to think about what would happen if other Chinese stocks were delisted.
We'll get into how you can respond in just a minute. First, here's how an Alibaba delisting could affect you...
Alibaba Delisting: How It Affects Investors
A giant sell-off is very likely in each case, whether it's Alibaba, Baidu Inc. (NYSE: BIDU), or another Chinese stock. And the effects of that could be devastating to Alibaba investors who bought into the e-commerce giant's success.
The company connects manufacturers and sellers worldwide. And it's been growing its revenue significantly every year. This year, it reported $509 billion in annual revenue, up 35% from $376 billion last year. In 2021, the company expects revenue of $650 billion, another 27%.
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The growth prospects for Alibaba are so great that CFO Maggie Wu called it a "challenging quarter" when the company's revenue rose 22% year over year for the January-March quarter. Wu assured investors that the company's accounting practices were stolid, "in accordance with U.S. GAAP."
Shares of BABA have appreciated about 126% over the last five years. So many investors will hurt if Alibaba stock leaves the NYSE.
But the question is still whether it's likely to happen. Can U.S. investors trust Alibaba's CFO?
Alibaba Delisting: Will It Happen?
The bipartisan Senate bill is the biggest, latest indicator of a potential delisting of Alibaba.
The bill was introduced by Senator John Kennedy (R-LA) and Senator Chris Van Hollen (D-MD), and it passed the Senate unanimously. Now, it just needs to go through the House of Representatives, then to the White House for signing.
The White House has been arguably the most anti-China of all the branches of government through the pandemic so far. U.S. President Donald Trump recently tweeted that it was the "incompetence of China" that resulted in the "mass worldwide killing."
Alibaba stock has fallen 8% since last Wednesday, when the Senate passed the bill. But the stock is still up 4% on the year.
The e-commerce giant has been one of the most reliable growers trading on the market. It's even outlasted the pandemic. So investors need a contingency plan for if these foreign stocks end up losing their positions.
If Alibaba is delisted, shares don't evaporate into thin air. In fact, shareholders still hold their shares. But without the NYSE making it easy to trade, monetizing shares of BABA will be difficult. It will be harder to find a buyer without that secondary market.
Traders could rush to sell their Alibaba stock and other Chinese companies. This would send their price plummeting. What happened to Luckin Coffee after it received its delisting notice is a likely outcome if BABA faces delisting. Remember, Luckin lost 94% of its price, falling from $38 to just $2 for the year.
A more likely scenario, however, is that BABA won't be delisted. This is a massive, global company with plenty of American interest tied up. That could be enough to keep the stock on the NYSE. It means Alibaba is more likely to comply with any new requirements and remain on the exchange.
Action to Take: Several Chinese stocks are likely going to be delisted from American stock exchanges. But Alibaba Group Holding Ltd. (NYSE: BABA) is likely not one of them. It's a huge company, more likely to comply with any new disclosure requirements popping up. But keep watching the press on U.S.-China and BABA over the next few weeks to stay on top of these developments.
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