Alibaba's (BABA -0.88%) stock price plunged 11% on July 29 after the U.S. Securities and Exchange Commission (SEC) added the Chinese tech giant to its list of stocks that could be delisted. That threat has being hanging over Alibaba ever since the Holding Foreign Companies Accountable Act (HFCAA), which demands that foreign companies (particularly Chinese ones) open their books to U.S. auditors, became law in December 2020.

Under the HFCAA, Chinese companies that don't comply with those tighter auditing standards for three consecutive years will be delisted from all U.S. exchanges, including over-the-counter (OTC) ones. China's Securities Regulatory Commission (CSRC) subsequently held talks with the SEC to prevent those delistings, but those discussions have been fruitless thus far.

Alibaba's campus in Hangzhou, China.

Image source: Alibaba.

To show that the countdown timer has already started, the SEC has been expanding a list (which now includes over 270 Chinese companies) of delisting candidates. It isn't surprising to see Alibaba finally join that list, since other Chinese tech giants like Baidu (BIDU -1.51%) and JD.com (JD -3.69%) were already added earlier this year.

But could Alibaba be worth buying as that news weighs down its stock price -- which has already fallen more than 70% since hitting its all-time high of $317.14 per share in October 2020? Let's review Alibaba's challenges and the possible outcomes of the delisting drama, and see if its stock can attract the bulls again.

What happened to Alibaba?

As China's largest e-commerce and cloud platform company, Alibaba seemed like a solid long-term investment. However, China's antitrust regulators cracked down on Alibaba's e-commerce business and slapped it with a record $2.8 billion fine in April 2021. It was also barred from locking in merchants with exclusive deals and using excessive promotions.

That crackdown eroded Alibaba's defenses against JD, Pinduoduo (PDD 0.26%), and its other rivals in China's crowded e-commerce market. It also coincided with a broader e-commerce slowdown across China as consumers reined in their spending in a post-lockdown market.

Alibaba's cloud growth also cooled as China's regulators cracked down on online games, streaming video platforms, online education services, and other internet-based apps, which had flourished during the pandemic. Many of those services ran on Alibaba Cloud. Meanwhile, China's broader economic slowdown caused Alibaba's enterprise customers to curb their spending on cloud services.

That's why its revenue growth decelerated in fiscal 2022, which ended this March, as its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin contracted and its adjusted net income declined:

Period

FY 2020

FY 2021

FY 2022

Revenue Growth

35%

41%

19%

Adjusted EBITDA Margin

31%

27%

19%

Adjusted Net Income Growth

42%

30%

(21%)

Data source: Alibaba.

That jarring slowdown -- which Alibaba blames on competitive, macro, and regulatory headwinds -- will likely continue. For fiscal 2023, analysts expect Alibaba's revenue to rise just 8%, for its adjusted EBITDA margin to slip to 18%, and for its adjusted earnings per share (EPS) to fall 5%.

What happens if Alibaba is delisted?

Alibaba said it would "strive" to maintain its New York Stock Exchange listing, but it also recently applied to upgrade its secondary listing in Hong Kong to a dual primary listing, which would enable mainland Chinese investors to also buy its stock for the first time. That change, which could be approved by the end of this year, could minimize the impact of a full delisting in New York.

If that worst-case scenario happens, Alibaba would likely allow its U.S. investors to trade their ADR shares for Hong Kong shares. However, investors would need to be using a brokerage that has access to the Hong Kong Stock Exchange, and pay some fees for the trade. The stock might also be allowed to temporarily shift to an OTC exchange until the transfer is completed.

But if investors don't have access to the HK Stock Exchange, they might be forced to liquidate their shares. All those uncertainties have made it difficult to invest in Alibaba, even for bullish investors who believe its e-commerce and cloud businesses will gradually recover over the long term. That's also why its stock still trades at just 10 times forward earnings.

Alibaba isn't a turnaround play right now

Alibaba already faces tough near-term challenges, and the delisting fears merely raise additional red flags for its beaten-down stock. Therefore, it's impossible to recommend buying this Chinese tech stock right now when so many other high-quality American tech stocks are still on sale.