I once considered Alibaba (BABA -0.21%) an undervalued growth stock. It still trades at just 21 times forward earnings, and analysts expect its revenue and earnings to rise 50% and 37%, respectively, this year. And its market-leading positions in China's e-commerce and cloud markets also grant it the scale to easily crush its smaller rivals.

But after carefully reviewing Alibaba again, I believe I'll never buy this seemingly attractive Chinese tech stock, for three simple reasons.

1. Its growing dependence on lower-margin businesses

Alibaba resembles an inverted version of Amazon (AMZN 0.23%). Whereas Amazon subsidizes the growth of its lower-margin retail segment with its higher-margin cloud business, Alibaba subsidizes the growth of its unprofitable businesses (including its cloud division) with its higher-margin "core commerce" revenue.

A stock chart in a window on a busy street.

Image source: Getty Images.

Therefore, Alibaba's future earnings growth relies heavily on its core commerce segment, which includes its online marketplaces, cross-border marketplaces, brick-and-mortar stores, and Cainiao logistics unit.

Alibaba's core commerce business is still growing at a healthy clip. Its core commerce revenue rose 35% in fiscal 2020, which ended last March, and accounted for 86% of its top line. The segment's revenue rose another 32% year over year in the first half of fiscal 2021.

However, it's also relying more heavily on its "New Retail" business (including its brick-and-mortar stores), its cross-border wholesale segment, and Cainiao to drive its growth. These businesses all generate lower-margin revenue than its core Taobao and Tmall marketplaces, which charge merchants listing fees and commissions.

That's why the adjusted EBITA margin of its core commerce segment declined from 38% to 35% between the second quarters of 2020 and 2021. Its total adjusted EBITA margin held steady at 27%, thanks to narrower losses at its unprofitable businesses, but that balancing act could easily fall apart in the near future.

2. Endless regulatory challenges

Meanwhile, a seemingly endless barrage of regulatory challenges in the U.S. and China could make it even tougher for Alibaba to keep growing.

A map of China with a declining chart in the foreground.

Image source: Getty Images.

Last December, the U.S. passed a law that would delist any foreign companies that didn't comply with new auditing requirements for three straight years. Alibaba's secondary listing in Hong Kong in late 2019 indicates its days on the NYSE could be numbered. 

Taobao also remains on the U.S. Trade Representative's "Notorious Markets for Counterfeiting and Piracy" blacklist due to the prevalence of counterfeit products across its platform. That reputation could spark sanctions against its cross-border marketplaces. 

In China, government regulators clearly want to rein in Alibaba. In 2019, the government sent officials to work at dozens of companies, including Alibaba, to oversee their operations. Last year, the Communist Party's Central Committee tightened that grip by requiring all companies to hire a certain number of registered members of the CCP.

That tension finally boiled over last year when China brought its hammer down on Alibaba. It derailed the long-awaited IPO of its fintech affiliate Ant Group, fined Alibaba over an unapproved acquisition, and launched a full antitrust probe into its e-commerce operations.

The regulators reportedly want Alibaba to end its exclusive deals with merchants and throttle its promotional pricing strategies, which could make it tougher for its core profit engine to keep running. It would also leave Alibaba more exposed to competition from JD.com (JD -0.25%) and Pinduoduo (PDD -2.99%) -- which both previously accused Alibaba of anticompetitive strategies.

3. Ethical considerations

Back in 2017, the Chinese government declared that the country would rely on Alibaba for the development of smart cities, Tencent (TCEHY 0.03%) for digital healthcare, and Baidu (BIDU 0.70%) for driverless cars.

The term "smart cities" might seem vague, but it's collectively referring to Alibaba's cloud services and facial recognition technologies. The Chinese government relies heavily on those technologies to monitor its citizens, and those technologies are tightly tethered to a government database.

That's already troubling, but Alibaba recently demonstrated how its technologies could be used to identify the faces of Uighurs and other ethnic minorities across China. Alibaba claims the feature can be embedded into websites to monitor users for terrorism, pornography, and other "red flags."

China's human rights record is already dismal, and it's currently accused of imprisoning and sterilizing Uighurs in reeducation camps, so Alibaba's disturbing claims spark far too many ethical concerns. They could also make Alibaba an easy target for sanctions if the Biden administration maintains the Trump administration's tougher stance against Chinese tech companies. As a result, I'm avoiding Alibaba for the same ethical reasons I recently sold Tencent: I'm simply not interested in owning a piece of China's mass surveillance system.

The key takeaway

I understand why Alibaba still looks like an appealing stock buy for many investors, and it could certainly climb higher in the future. However, there are simply too many regulatory, growth-related, and ethical challenges ahead for me to consider it a worthy long-term investment.