Alibaba (BABA -1.66%), the largest e-commerce and cloud infrastructure company in China, went public in September 2014. Its stock price rose 38% on the first trading day, giving it a market cap of $231 billion. 

Last October, Alibaba's share price hit a record high of $319 and its market cap approached $850 billion. At the time, Alibaba seemed destined to become the first trillion-dollar Chinese tech company. 

An Alibaba display commemorating its "510 AliDay" employee appreciation festival.

Image source: Alibaba.

However, Alibaba's stock price has plunged since hitting that high, reducing its valuation to about $460 billion. Let's see why Alibaba's stock crashed, and if it could rebound back toward the $1 trillion mark by 2025.

What happened to Alibaba?

Alibaba's precipitous decline started last December when China's State Administration for Market Regulation launched an antitrust probe into its e-commerce business. Alibaba was eventually fined 18.23 billion yuan ($2.82 billion), and its e-commerce business was forced to eliminate its exclusive deals with merchants and reevaluate its pricing strategies.

Alibaba paid the record fine, which was equivalent to 12% of its net income in fiscal 2021, in the fourth quarter of that year. Alibaba was also hit by smaller fines over unapproved investments and acquisitions. 

To make matters worse, the Chinese government suspended Ant Group's IPO last November after Ant's founder and Alibaba's former CEO Jack Ma criticized the country's banking system. Alibaba, which owns a third of Ant and uses its Alipay platform to facilitate customers' online transactions, stood to profit from its IPO.

China's ongoing crackdown on its top tech companies, as well as a new U.S. law that could delist shares of Chinese companies that don't comply with new auditing rules within the next three years, caused even more investors to shun Alibaba.

Alibaba's revenue miss in the first quarter of 2022, followed by an abrupt decision to invest 100 billion yuan ($15.5 billion) into China's "common prosperity" initiatives for improving social equality over the next five years, raised even more questions about its growth and subservience to the Chinese government. 

Could Alibaba still become a $1 trillion company?

Alibaba suffered some serious setbacks over the past year, but its core businesses are still growing. In fiscal 2021, which ended this March, Alibaba's revenue rose 41% to 717.3 billion yuan ($109.5 billion) as its adjusted net income (which excludes the antitrust fine) increased 30% to 172 billion yuan ($26.3 billion). Its core commerce revenue rose 42% as its cloud computing revenue increased 50%. 

Tiny parcels on a laptop keyboard.

Image source: Getty Images.

Analysts expect Alibaba's revenue to rise 29% this year, but for its adjusted EPS to decline 26% as it relies more heavily on its lower-margin retail businesses (including its brick-and-mortar stores, direct sales channels, overseas marketplaces, and Cainiao logistics subsidiary) and makes new investments. 

Next year, they expect Alibaba's revenue and adjusted EPS to rise 21% and 15%, respectively, assuming the company doesn't face any more regulatory challenges.

Based on those estimates, Alibaba's stock trades at 20 times this year's earnings and three times this year's sales.

Amazon (AMZN -0.34%), which is growing at a similar rate as Alibaba, trades at 65 times this year's earnings and four times this year's sales. Therefore, Alibaba's regulatory headaches -- and the market's distaste for Chinese stocks -- are clearly depressing its valuations. 

But if Alibaba meets analysts' expectations over the next two years, then continues to grow its revenue and earnings per share at 20% for another two years, it could generate 1.61 trillion yuan ($248.9 billion) in revenue and 78.89 yuan ($12.22) per share in earnings in fiscal 2025.

If its price-to-sales ratio holds steady, it could be worth about $750 billion by the beginning of 2025. But if the regulatory headwinds fade and Alibaba commands higher valuations again, its market cap could exceed $1 trillion by 2025.

The bottom line

It's tough to recommend buying any Chinese tech stocks right now, but Alibaba isn't down for the count yet. Investors who are willing to look past all its near-term challenges could potentially own a piece of a $1 trillion company by 2025, but it could be a very bumpy ride.