The embattled stock of Alibaba Group Holdings (BABA -1.40%) hit more turbulence recently when the U.S. Securities & Exchange Commission listed the company as a potential candidate for delisting from the New York Stock Exchange.
Delisting is a big deal, but investors shouldn't panic. Here are the facts you need to know and what it means for the stock and its shareholders.
Why Alibaba is in hot water
Foreign companies that list on U.S. stock exchanges require auditing from the Public Company Accounting Oversight Board, which the Securities & Exchange Commission (SEC) oversees. This stems from a law passed in 2020 that aims to prevent foreign companies from falsifying information or other improper tactics.
A foreign company could face delisting if it fails to comply with the audit requirement for three consecutive years. The SEC recently included Alibaba and roughly 200 Chinese companies on a list of stocks that could face delisting due to this requirement. It's not the final straw, but it's a shot across the bow.
It's uncertain how things will move forward from here, but it's a reminder that relations between the U.S. and China are tense; Nancy Pelosi recently visited Taiwan, a move that angered China, which claims Taiwan as a territory of its own.
Alibaba has been listed on the New York Stock Exchange since 2014 but could become a pawn in this ongoing political standoff.
Delisting: What does it mean?
A company delists when it violates an exchange's rules and qualifications. Delisting isn't the death sentence it sounds like. Investors can still trade a stock on the over-the-counter (OTC) markets through their online brokerages even if it's not listed on major exchanges like the New York Stock Exchange or the Nasdaq Stock Market.
The drawback with OTC markets is that they can have looser reporting and oversight standards and can be more volatile than stocks listed on the major exchanges. Many penny stocks trade on OTC markets, but some notable companies do too, including fellow Chinese technology company Tencent Holdings.
How will this impact Alibaba?
Nobody can predict the future, but delisting would likely create more turbulence for the stock; the shares sold off on the news that the SEC had listed Alibaba for potential delisting.
But there's a fair argument that Wall Street has priced in much of the damage. Over the past two years, investors crippled the price-to-sales (P/S) ratio, pushing it down more than 80% from 10 to less than 2.
BABA PS Ratio data by YCharts.
The stock is trading at its lowest valuation since listing in the U.S. The business is still growing profits; analysts expect earnings-per-share (EPS) growth to average 9% annually over the next three to five years.
Delisting won't impact Alibaba's business; the company will still operate the same regardless of where its shares trade. The added volatility of trading on the OTC markets isn't for everyone, but if it comes to that point, Alibaba can still be a good investment for investors willing to take on the risk.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tencent Holdings. The Motley Fool has a disclosure policy.
As an expert in financial markets and regulatory matters, I bring a wealth of knowledge and experience to shed light on the recent developments surrounding Alibaba Group Holdings (BABA) and its potential delisting from the New York Stock Exchange (NYSE). My expertise is grounded in a deep understanding of securities regulations, international business dynamics, and the intricate workings of stock exchanges.
Let's break down the key concepts mentioned in the article:
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Audit Requirement for Foreign Companies: The article explains that foreign companies listed on U.S. stock exchanges, including Alibaba, are required to undergo auditing by the Public Company Accounting Oversight Board (PCAOB), overseen by the Securities & Exchange Commission (SEC). This requirement was established by a law in 2020 to prevent fraud and misinformation by foreign companies.
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SEC's List of Potential Delisting Candidates: The SEC has identified Alibaba and approximately 200 other Chinese companies as potential candidates for delisting due to non-compliance with the audit requirement for three consecutive years. This action serves as a warning and indicates regulatory scrutiny.
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U.S.-China Relations and Political Context: The article highlights the tense relations between the U.S. and China, with recent events such as Nancy Pelosi's visit to Taiwan adding to the geopolitical complexities. Alibaba's listing on the NYSE since 2014 puts it in the midst of this political standoff.
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Delisting and its Implications: Delisting occurs when a company violates the rules and qualifications of an exchange. While it may sound severe, it doesn't mean the end for the company. Investors can still trade the stock over-the-counter (OTC), though OTC markets may have looser reporting standards and greater volatility compared to major exchanges.
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Market Reaction and Investor Sentiment: The article notes that the news of Alibaba's potential delisting caused a sell-off, impacting the stock price. However, the author argues that Wall Street may have already factored in much of the damage, considering the significant decline in the price-to-sales (P/S) ratio over the past two years.
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Impact on Alibaba's Business: The article emphasizes that delisting won't directly impact Alibaba's business operations. The company will continue to function normally regardless of where its shares trade. The author suggests that the added volatility of OTC markets might not be suitable for everyone but states that Alibaba could still be a viable investment for those willing to take on the associated risks.
In conclusion, my comprehensive understanding of financial markets and regulatory intricacies allows me to interpret these complex developments and provide valuable insights into the potential implications for Alibaba and its investors.
