The Hammer Drops on Alibaba (NYSE:BABA), But Keep It in Mind

Just yesterday, we noted that it was crucial to keep a close watch on Alibaba (NYSE:BABA) stock, because there were several possible impacts to its overall operations to come. One of them seems to have hit, and in a big way, as the Chinese hammer just dropped on the company. Much of what will be happening to the stock in the next few days will be a result of the events that followed.

A Tale of Losses and Recovery, But Mostly Losses

Just ahead of Christmas, Alibaba got some serious coal in its stocking as the company took a hit that cost it just over 13% of its share price. While it took another note of decline as post-holiday trading started up, that was about the time recovery kicked in and delivered some new value for the company. In fact, the very latest trading saw some recovery as the stock picked up 3% of its value at one point.

Alibaba's recovery, reports note, was sufficient to give the entire Hong Kong tech sector a bit of a boost, with the Hang Seng Index up around 1% as investors took advantage of the price drops to load up on fresh shares. Alibaba's recovery was joined by close competitor Tencent Holdings (OTCMKTS:TCEHY) and Meituan (OTCMKTS:MPNGF), giving the entire field a boost. With Alibaba now trading above yesterday's close, at last report, it's clear that the company has made some kind of recovery.

However, based on our latest research of the broader analyst community, neither set of moves has been sufficient to change minds much in the analyst sector. The latest change in analyst perception remains the change Barclays made back on November 9, where it boosted its price target from $360 to $365.

More Trouble From Government Regulators

When we took a look at Alibaba yesterday, we noted that one of the biggest problems it faced was the potential for government regulators to step in. At the time, we noted that there were potential problems not only from the Chinese government, but also from the US government thanks to new laws that may ultimately see Alibaba et al de-listed from the NYSE and other exchanges. Potential has become reality, however, in the case of the Chinese regulatory environment.

The investigation ordered Christmas Eve—which some point to as a major cause of the drop—has apparently borne sufficient fruit that new reports suggest the Chinese government has ordered Jack Ma, CEO of Alibaba and its various subsidiary operations, to scale back operations in its Ant Group financial technology arm.

The Chinese central bank, as represented by deputy governor Pan Gongsheng, declared Ant Group's corporate governance to be “not sound”, and required it to “return to its origins” focusing on payment services. On the likely chopping block going forward will be several of Ant's sub-groups, including wealth management, insurance, and credit operations. It will likely not be lost on investors that these operations are not only Ant's most profitable, but also its fastest-growing operations.

A Three-Legged Stool Minus a Leg

There is good news to come out of this development, if only somewhat good. The Chinese central bank's call for Ant Group to return to its origins as a payment processor are likely to pull it out of several highly-profitable ventures. That's not good news at all, really. But the Chinese central bank's call seems to have ignored the connection that Ant Group has to Alibaba and its line of e-commerce shopping options. Which means it appears to be perfectly okay, at least for now, for Alibaba to continue processing its own payments for shopping made online, which could be saving it a hefty sum of potential outgo.

Make no mistake, the Chinese edict is a blow, and it's likely to send Alibaba into at least a bit of a slump short-term. However, the Chinese edict doesn't impact all of Alibaba's diversification operations, which means the company can effectively insulate itself from some blows dealt by the broader economy.

This brings us full-circle to yesterday's conclusions: if you've already got Alibaba stock, it's worth hanging on to. Keep a close eye on it, though, as it's a fairly safe bet it's going to lose ground in the short term. It's still got plenty of arrows in its collective quiver, though, so don't look for utter disaster. At worst, look for a partial disaster, and one that may recover in fairly short order.