Had you bought $1,000 worth of Alibaba (BABA 1.45%) stock at its all-time high of $317 in late 2020, you would have just $230 today -- a decline of 77%. And while the company's valuation now looks attractive compared to those of e-commerce rivals like Amazon, investors should keep an eye on its slowing revenue growth and the increasingly unpredictable regulatory environment in China. Let's dig deeper. 

What went wrong for Alibaba? 

With a market share of 47%, Alibaba is the undisputed leader in Chinese e-commerce. And its influence extends across several industries, including brick-and-mortar retail, logistics, and cloud computing (where it controls 37% of that segment). Alibaba's scale gives it an economic moat through network effects. More customers attract more merchants, which increases competition and the quality of product listings. The e-commerce business also creates a "captive" market for other services like payment processing and other financial services.  

Until recently, Alibaba's many advantages helped it maintain a healthy growth rate, with revenue rising 32% year over year to $28.6 billion in 2021. But now a top-line deceleration, coupled with a harsh and unpredictable regulatory environment, makes its future look grim. 

The problem with investing in China 

Unlike financial metrics like revenue and earnings, political and regulatory risks are extremely difficult to quantify or predict -- especially in less transparent jurisdictions like China.

According to Time magazine, Alibaba's problems may have started after its founder Jack Ma called for reform of the country's financial and regulatory system. Within weeks, the controversial billionaire was called in for questioning, and the planned spin-off of Alibaba's $37 billion financial subsidiary, Ant Financial, was suspended despite previously receiving a green light. 

This was the first of many adverse regulatory actions against Alibaba (typically related to alleged antitrust violations). And for investors, the episode highlights an alarming overhang that may haunt the company.

Red stock charts flashing sell

Image source: Getty Images.

Worsening U.S.-China relations are another red flag.  In October, the U.S. commerce department announced significant regulations designed to limit the sale of semiconductors and chip-making equipment to Chinese companies. For Alibaba, this is a big blow to ambitions in technologies like cloud computing, which relies on this advanced equipment. Alibaba's cloud segment represented 9% of total revenue (17.7 billion RMB or $2.4 billion) in the second quarter.

Revenue is slowing down 

Alibaba's fiscal first-quarter results highlight its weakening financial situation. Revenue was flat year over year at $30.69 billion as a 1% decline in the China e-commerce segment was offset by a 10% expansion in cloud computing. Adjusted earnings before interest, taxes and amortization (EBITA) fell 18% to $5.14 billion as the company struggled with challenges like China's zero-COVID policy, which put pressure on its margins.  

While management has not provided guidance for the future, regulatory challenges such as China's harsh COVID-19 policy and the U.S. chip export ban could turn the current slump into a long-term problem.

Alibaba stock is cheap for a reason 

While Alibaba's forward price-to-earnings multiple of just 9.3 is low compared to those of U.S. rivals like Amazon (which trades for 48 times projected earnings), the company's political and regulatory headwinds represent a risk that is difficult to account for by simply looking at its financial metrics. Investors should avoid Alibaba stock because these challenges don't seem likely to abate any time soon.