What China's new antitrust rules mean for big tech companies like Alibaba

Shares of Alibaba fell on Wednesday — despite setting a new record for Singles’ Day — after Beijing released draft rules defining what constitutes anti-competitive behavior for the first time ever. CFRA’s John Freeman joins Yahoo Finance Live to discuss the implications of the move for China's big tech companies such as Alibaba and JD.com.

Video Transcript

JULIE HYMAN: Let's talk more about the effect on Alibaba specifically, as well as those Singles Days-- Day numbers. Let's bring in John Freeman. He is an analyst at CFRA who tracks the company. John, I do want to get to Singles Day, but I do have to ask you about these new regulations first, and the market reaction is pretty dramatic. Is it justified? Is this going to be a big curb on the company's growth?

JOHN FREEMAN: I absolutely think so. So I think that, I mean, it's clear to me that Alibaba and Baidu both have, they traded a substantial discount for a similar business that would be in the United States, and that's primarily because of the, you know, let's call it the rule, the rule by Fiat, rather than rule of, rule by law principle upon which the Chinese Communist Party follows.

I mean, that's been well understood and was kind of, you know, forgotten and so forth when Deng's you know, Deng Xiaoping's reforms came in and laid a foundation for, you know, more of a rule of law, you know, how to resolve contract disputes, all of that stuff. I think Xi Jin-- Xi Jinping is really, you know, look to, to backtrack on that, and to reassert control. And I think that, that does not, that's not good news for, for innovation.

That's not good news for, you know, for, you know, what we normally think of us as free market operation, and frankly, we had a little bit of that here in the United States as well, although we have a process by which all of these changes can be made, whereas the Chinese Communist Party, I mean, the day before Singles Day, you know, they enacted, a, they, they throw down this, you know, proposed changes, and anti-monopolist-- you know, anti-monopolistic practices. That's, that's a pretty clear shot over the bow and maybe even, you know, clipped the side of the ship a little bit.

BRIAN SOZZI: John, isn't the other problem here, too, that Alibaba, JD.com I walked down pretty much any street here in the US, Alibaba who? JD.com who? These companies have not been able to diversify their businesses outside of China.

JOHN FREEMAN: That's right. However, it does matter for, you know, teachers' unions and you know, you know, all of the different public, public monies, that go, you know, that now invest in the stock market, right? And that, you know, California teachers' union, CalPERs, I'm sure, has some significant position in, in Alibaba or other Chinese companies, so it, you know, with the shares down, it also, it also, you know, it will upset US investors, but in terms of expanding into the US, yeah, no.

There's not, I look at Alibaba, and I focused on the Chinese market, and I focused on the cloud computing opportunity, which was outstanding [? this ?] quarter, but I still have to keep a hold, and I, you know, I reduced our target price from 305 to 280 just because a lot of it had to do with a lot of this increasing, you know, I don't know how to put it, aggressive, you know, anti-, anti-internet and, you know, right, policies by, by the [INAUDIBLE].

MYLES UDLAND: Well, and I guess thinking about your price [INAUDIBLE], your range, [INAUDIBLE], as an analyst, how are you even able, I guess, to really trust the numbers that you are going to get out of a company like that and

JOHN FREEMAN: Yeah.

MYLES UDLAND: And trust the model overall, right? I mean, it seems like things could change [INAUDIBLE] the government.

JOHN FREEMAN: That's right, and people may have forgot, like, there are some-- if you just look at Alibaba's balance sheet or cash flow statement over, let's say the last five years, there are all kinds of numbers moving all over the place. It is a really complicated, overly complex, sort of capital structure, and you know, I don't know if there are any financial shenanigans, but it certainly raises a lot of questions and has always led me to, you know, whatever trailing, whatever trailing average multiple I use for the stock, I cut it by 15%, but just because, just to build in all of that, you know, to have all of that risk built in. I think Alibaba is a fantastic company, very innovative, but it's speculative. The stock is speculative. If you're putting it [INAUDIBLE], if you're investing in Alibaba, you're really, I think, taking a greater chance than your average investor would be tolerant.

JULIE HYMAN: I do want to ask about Singles Day, and I have to admit, John, I'm having a little trouble with the Singles Day numbers, because they, they began at the beginning of November. So how do we, how do we do sort of like for like here, and how is Singles' Day going versus prior years?

JOHN FREEMAN: Yeah, I think that it used to be more of a marketing event, whereas, you know, with that, the hype itself would then, sort of, have an afterglow for weeks or months or whatever and get more people interested in Alibaba and more people sort of habitually spending on it, you know, equivalent to an Amazon Prime kind of situation. But now, it's just, I think they're just, either pulling in or pulling forward, sales that may [? have already, ?] you know, would probably already occur on the Alibaba platform, given that it is, has such a huge market share, right?

And that COVID-19 is really, really the catalyst that has accelerated e-commerce relative to overall retail, right, in China, which is now, I think, something like last number, I mean, pre-COVID was [? literally ?] like 37%, 38% of Chinese retail is e-commerce compared to something like 15%, 16%, 17% for the US, so, so it does, it does matter, but Singles Day I think is more of that, kind of, I think it's less meaningful now.

JULIE HYMAN: All right, all right. Well, we'll keep watching it and see what effect all this regulation and proposed regulation has. Thanks for your perspective, John. John Freedman is an analyst at CFRA.