Alibaba (BABA -1.64%), the largest e-commerce and cloud company in China, went public at $68 per share on Sept. 19, 2014. It raised $25 billion and eclipsed Meta Platforms (META -2.77%) as the largest U.S. IPO in history.
If you had invested $5,000 in Alibaba's IPO, your investment would be worth about $9,000 today. That's not a bad return, but the same investment in rival JD.com's (JD -2.12%) IPO earlier that year would be worth over $19,000 today. Alibaba has also underperformed the S&P 500's gain of more than 130% since its public debut.
Let's see why investors initially fell in love with Alibaba, why that relationship soured, and if this Chinese tech giant's stock is still a worthwhile investment.
Why investors fell in love with Alibaba
When Alibaba went public, it dazzled U.S. investors for four reasons.
First, its Taobao and Tmall marketplaces dominated the Chinese e-commerce market. These marketplaces were mainly listing platforms for third-party sellers, so they weren't as capital-intensive as JD's first-party marketplace, which took on inventories and fulfilled its own orders.
Second, Alibaba tethered its shoppers to Alipay, the digital payments platform founded by Jack Ma. Alipay gave Alibaba an early-mover's advantage in China's expanding market for cashless payments.
Third, Alibaba owned the country's largest cloud infrastructure platform. Alibaba Cloud tethered more companies to its e-commerce and fintech ecosystems, and the platform served as a springboard for launching new AI services, smart speakers, and other Internet of Things (IoT) devices.
Lastly, Alibaba generated plenty of cash to fund the expansion of its sprawling ecosystem into new markets, including streaming media, a movie production studio, news outlets, and even video games. It also opened brick-and-mortar supermarkets, acquired other retailers, and invested in smaller companies to expand its reach beyond the retail and cloud markets.
Between fiscal 2015 (which ended in March 2015) and fiscal 2020, Alibaba's revenue grew at a compound annual growth rate (CAGR) of 46.2%. Its adjusted net income also increased at a CAGR of 30.5%.
Those impressive growth rates impressed the bulls and propelled Alibaba's stock to an all-time high of $317.14 per share just last October. At the time, your $5,000 investment would have been worth more than $23,000.
Why investors fell out of love with Alibaba
But shortly after Alibaba's stock hit that record high, a series of unfortunate events unfolded. Last November, the Chinese government blocked Alibaba's affiliate Ant Group, which owns Alipay, from going public after Jack Ma publicly criticized China's banking system. Alibaba, which owns a third of Ant, had expected to reap big profits from that IPO.
The following month, China's State Administration for Market Regulation (SAMR) launched an antitrust probe into Alibaba's e-commerce business. The SAMR slapped Alibaba with a record 18.2 billion yuan ($2.9 billion) fine this April and forced it to end all of its exclusive deals with merchants. Alibaba was also hit with smaller fines in response to its previously unapproved investments and promotional pricing strategies.
Alibaba's revenue still rose 41% in fiscal 2021. Its adjusted net income, which excluded the impact of the antitrust fine, grew 30%. The bulls pointed to those growth rates and claimed Alibaba's core business was still healthy.
But in the first half of fiscal 2022, Alibaba's revenue growth decelerated. It also relied more heavily on its lower-margin businesses (including its brick-and-mortar stores, direct sales channels, overseas marketplaces, and Cainiao logistics division) to offset the slower growth of its online marketplaces.
During its earnings reports in May and August, Alibaba told investors its revenue would rise 30% in fiscal 2022. But in November, it abruptly reduced that forecast to just 20%-23% growth in response to tougher headwinds for its e-commerce business. Analysts expect its full-year earnings to drop 16% as its margins continue to contract.
That slowdown is disappointing, especially since Alibaba generates all of its profits from its commerce business to support its unprofitable cloud, digital media, and innovation initiatives segments. It also indicates the antitrust crackdown will throttle its near- to mid-term growth.
But that's not all. Alibaba has also pledged to invest 100 billion yuan ($15.7 billion) into China's "common prosperity" drive to reduce social inequality over the next five years. That big commitment, which is likely aimed at appeasing Chinese regulators, could throttle its cash flow growth.
Last but not least, there's the U.S. threat to delist shares of Chinese companies that don't comply with new auditing standards within the next three years. Alibaba's IPO in Hong Kong -- along with DiDi's (DIDI -2.69%) plans to delist its shares -- suggests its days on the New York Stock Exchange might be numbered.
Alibaba still looks like a value trap
Alibaba's stock might look like a bargain at less than 13 times forward earnings. After all, JD -- which faces far fewer regulatory headwinds than Alibaba -- trades at 36 times forward earnings.
However, Alibaba is cheap for obvious reasons. Its growth is decelerating, its margins are under pressure, and it faces tough regulatory headwinds on both sides of the Pacific. Alibaba's stock will likely continue to underperform the market until it resolves those pressing issues.