To The Moon

On Monday, February 24, 2025, China concept stocks faced a significant setback, with the NASDAQ Golden Dragon China Index ( $NASDAQ Golden Dragon China Index(HXC)$ ) dropping by approximately 5.24%. Alibaba ( $Alibaba(BABA)$ ), a flagship name among these stocks, retraced 10.23% in U.S. trading, closing at $129.04, while its Hong Kong-listed shares also pulled back during the day. This sudden decline has sparked critical questions among investors: Is the bull market for China stocks over? Should you take profits on Alibaba now, or is $120 a good chance to add to your position? What’s a realistic target price for Alibaba moving forward?

Chart for Nasdaq Golden Dragon China Index

Chart for $BABA

The trigger for this market reaction appears to be a National Security Presidential Memorandum (NSPM) signed by President Donald Trump on February 22, 2025. As the memo’s implications ripple through the market, its potential to evolve into enforceable executive orders or laws looms large, prompting investors to reassess their strategies. In this article, we’ll dissect the memo line by line to uncover the reasons behind Monday’s decline, analyze Alibaba’s position amid this pullback, and offer guidance on whether to buy, hold, or sell.

Decoding Trump’s Memo: Line-by-Line Implications

The NSPM, titled "Memorandum on Safeguarding United States Economic Security and Growth," outlines several measures that directly and indirectly impact China concept stocks—companies with significant operations in China but listed on exchanges outside the mainland, such as Alibaba. Let’s break it down:

1. Restricting Chinese Investments in Strategic U.S. Sectors: The memo directs the Committee on Foreign Investment in the United States (CFIUS) to enhance scrutiny and restrict investments from China into critical U.S. industries, including technology, healthcare, energy, and infrastructure. For Chinese companies like Alibaba, which operates in e-commerce, cloud computing, and AI, this could limit opportunities for partnerships or expansion in the U.S. market, a key growth avenue for tech giants.

2. Limiting U.S. Investments in China’s Sensitive Technologies: It imposes new restrictions on U.S. outbound investments to China, targeting sectors like semiconductors, AI, and biotechnology, citing China’s Military-Civil Fusion strategy. This hits Alibaba directly in its growth engines—cloud computing and AI. Reduced U.S. capital inflows could constrain funding for these initiatives, potentially lowering valuations and growth prospects for China concept stocks.

3. Fast-Tracking Investments from U.S. Allies: The memo establishes a “fast-track” process for investments from U.S. allies, including expedited reviews for projects exceeding $1 billion. While not explicitly targeting China, this measure strengthens economic ties with allies like Japan and South Korea, potentially diverting investment away from China and increasing competitive pressure on companies like Alibaba.

The memo also references previous actions, such as the Section 301 investigation into China’s trade practices and the now-ended Department of Justice China Initiative, providing historical context for Trump’s current policy. Furthermore, it addresses concerns about China’s exploitation of U.S. capital, citing instances like Chinese hackers breaching the Treasury Department’s CFIUS office, and highlighting cybersecurity threats.

The memo’s immediate effect was a wave of uncertainty. On Monday, February 24, 2025, investors reacted swiftly, driving Alibaba’s U.S.-listed shares down 7% and the broader Golden Dragon China Index by 5.24%. The fear is palpable: if these provisions become enforceable laws, they could reshape U.S.-China economic relations, with lasting consequences for China concept stocks.

Why Did Alibaba Retrace 10% on Monday?

Alibaba’s 10.23% pullback reflects both macro-level fears and its unique exposure to the memo’s implications. As a tech conglomerate with stakes in e-commerce, cloud computing, and AI, Alibaba is particularly vulnerable to restrictions on technology-related investments. The market’s reaction suggests investors are pricing in:

• Geopolitical Risk: Heightened U.S.-China tensions threaten Alibaba’s ability to access U.S. capital and technology, critical for its AI and cloud ambitions.

• Sentiment Shift: The memo has reignited trade war anxieties, prompting a sell-off in China concept stocks as investors seek to de-risk their portfolios.

• Broader Market Context: While the memo was the primary catalyst, China’s uneven economic recovery—marked by a real estate crisis and tepid consumer spending—may have amplified the decline.

However, Alibaba’s drop wasn’t isolated. Other China concept stocks, like Bilibili and Kingsoft Cloud, also saw significant declines, underscoring the memo’s widespread impact on investor confidence.

Is the Bull Market for China Stocks Over?

The bull market for China concept stocks gained traction in early 2025, fueled by China’s stimulus efforts and optimism around tech giants like Alibaba. Monday’s decline raises doubts about its sustainability. Here’s a balanced view:

1. Bearish Signals:

• The memo introduces prolonged uncertainty. If it leads to specific bans or escalated trade barriers, China's concept stocks could face sustained pressure.

• Weakness in China’s domestic economy, including sluggish retail spending, could further weigh on growth stocks like Alibaba.

2. Bullish Counterpoints:

• China’s government is doubling down on economic stabilization, which could bolster domestic firms like Alibaba.

• Valuations remain attractive. Alibaba, for instance, trades at a forward P/E of 13.5 for FY’26 (more on this below), suggesting room for upside if risks subside.

While the bull market faces near-term headwinds, it’s too early to call it dead. The outcome hinges on how the memo’s contents evolve and whether China’s economic recovery gains momentum.

Alibaba’s Outlook: Strengths and Risks

Despite Monday’s pullback, Alibaba’s fundamentals offer a compelling case:

1. Recent Performance: In Q3 FY’25 (ending December 31, 2024), Alibaba reported a 5% revenue growth to 236.5 billion yuan ($33.7 billion) and a 58% surge in net income to 43.9 billion yuan ($6 billion), beating expectations. Its core e-commerce platforms, Taobao and Tmall, grew steadily, while cloud and AI segments showed promise.

2. Growth Drivers: Alibaba plans to invest over $50 billion in AI over the next three years, aiming to lead China’s AI race—a move that could pay off if regulatory hurdles are navigated successfully. Positive signals, like Jack Ma’s inclusion in meetings with President Xi Jinping, may bolster investor confidence.

3. Risks:

• U.S. Restrictions: Limits on tech investments could hamper Alibaba’s cloud and AI plans.

• China’s Economy: Weak consumer sentiment and competition from discount platforms like Pinduoduo pose challenges to e-commerce growth.

• Regulatory Uncertainty: While China’s tech crackdown has eased, the U.S. memo adds a new layer of complexity.

At $129.04 post-pullback, Alibaba’s valuation is enticing. With FY’25 EPS projected at $8.52 (ending March 31, 2025), its forward P/E is 15.1. For FY’26, earnings are expected to rise 12% to $9.58, yielding a forward P/E of 13.5—modest for a tech leader.

Target Price for Alibaba

Setting a target price involves weighing Alibaba’s growth potential against geopolitical risks. Based on current data:

• Base Case: A P/E of 15 applied to FY’26 EPS of $9.58 suggests a target of $143.70, an 11% upside from $129.04.

• Optimistic Scenario: If AI investments drive stronger growth, a P/E of 17 could push the target to $162.86, a 26% gain.

• Downside Risk: Escalating U.S. restrictions could dent earnings, pulling the stock below $120 if sentiment sours further.

A realistic target range for Alibaba’s U.S.-listed shares over the next 12–18 months is $140–$160, assuming moderate growth and no severe escalation in U.S.-China tensions. For the Hong Kong listing (in HKD), the analysis scales accordingly, though currency fluctuations may affect returns.

Conclusion: A Judgment Call Amid Uncertainty

Monday’s 7% retracement in Alibaba and the broader decline in China concept stocks stem from President Trump’s memo, which signals tighter U.S.-China investment controls. As its contents potentially become enforceable, investors must navigate heightened risks. The bull market for China stocks isn’t necessarily over, but it’s on shaky ground until the memo’s full impact crystallizes.

For Alibaba, the pullback juxtaposes strong fundamentals—growth in AI, cloud, and e-commerce—against geopolitical and economic headwinds. At $129.04, with a possible dip to $120, the stock offers value, but not without risk. My target price of $140–$160 reflects cautious optimism, contingent on Alibaba meeting growth goals and U.S.-China tensions stabilizing.

What to Do? If you’re risk-averse, take profits now. If you’re a long-term bull, hold or add at $120. Ultimately, your move depends on how you judge Alibaba’s future amid this unfolding macro-level shift. Stay tuned to quarterly results and policy developments—they’ll shape the next chapter for Alibaba and China concept stocks alike.

@TigerWire