Alibaba (BABA 1.51%), which owns the largest e-commerce and cloud platforms in China, was once considered a solid growth stock. But over the past two years, its stock was crushed as the company dealt with: An antitrust probe, which resulted in a record $2.8 billion fine and tighter e-commerce restrictions; the slowdown of the Chinese economy, which was exacerbated by the country's draconian "zero-COVID" shutdowns; and delisting threats amid escalating tensions between the U.S. and China.

Last month, Xi Jinping's confirmation to an unprecedented third term as the general secretary of the Chinese Communist Party -- which suggests most of those headwinds will persist -- drove Alibaba's stock even lower. As a result, Alibaba's stock now trades nearly 80% below its all-time high and hovers just slightly above its IPO price of $68 a share from September 2014.

Alibaba's campus in Hangzhou, China.

Image source: Alibaba.

Alibaba's stock looks incredibly cheap at 9 times forward earnings, but can it overcome some of those near-term challenges? Let's review two recent developments, which can be considered a green flag and a red flag, to see if Alibaba's stock has a shot at bouncing back in 2023.

The green flag: A relaxation of COVID-19 restrictions

The COVID-19 pandemic generated temporary tailwinds for other overseas e-commerce giants like Amazon (AMZN 0.17%), MercadoLibre, and Sea Limited's Shopee, but the crisis actually generated more headwinds for China's top e-commerce companies. Back in 2020, Alibaba and its peers didn't experience a prolonged acceleration in online shopping because China contained the first COVID-19 wave a lot faster than other countries. A lot of that temporary growth was also stifled by the impact of other macro headwinds on consumer spending.

Those headwinds persisted into 2021, when China's antitrust regulators cracked down on Alibaba and imposed new restrictions on its exclusive deals with merchants, marketing strategies, and investments. At the same time, new COVID-19 variants prompted the Chinese government to implement stricter lockdown measures which further curbed consumer spending, shut down businesses, and disrupted the supply chains and logistics networks of e-commerce companies.

Therefore, the notion that China could maintain its zero-COVID policies is driving investors away from Alibaba. But in early November, China finally eased some of those restrictions by reducing its quarantine times for close contacts and eliminating its quarantine requirements for secondary contacts. It relaxed those rules even as COVID-19 cases surged in Beijing, Guangzhou, and Zhengzhou -- which suggests that the country could officially phase out its zero-COVID policy next year.

The red flag: Its decelerating Singles Day sales growth

Back in 2009, Alibaba launched its first Singles Day sale on Nov. 11. The sale, which is comparable to Amazon's Prime Day or Black Friday, was only held as a single-day sale until 2019. Starting in 2020, the annual shopping holiday was extended to 11 days. Alibaba started reporting its year-over-year Singles Day sales growth in 2010, and it maintained that annual tradition through 2021. In 2020, its gross merchandise volume (GMV), or the value of all goods sold across all of its e-commerce platforms, increased 26% in 2020 but grew just 8.5% in 2021.

Alibaba's Singles Day results were often considered a barometer of its core e-commerce business and the entire Chinese e-commerce sector. But this year, Alibaba declined to provide its final Singles Day GMV tally for the first time ever, and it merely said its results were "in line" with the previous year. That slowdown indicates that Alibaba's Chinese commerce business, which generated 69% of its revenue in its latest quarter, is still struggling with macroeconomic headwinds, stiff competition from rivals like JD.com (JD 3.94%) and Pinduoduo (PDD 4.46%), and intermittent COVID-19 shutdowns. The segment's revenue already declined 1% year over year last quarter, and it will likely continue to struggle unless China phases out its COVID-19 restrictions and consumer spending across the country stabilizes.

The sluggish growth of Alibaba's Chinese e-commerce platforms will also likely hurt its other unprofitable businesses -- which include its Cloud, Digital Media and Entertainment, and Innovation Initiatives divisions -- because it subsidizes all of them with its e-commerce profits. In other words, its core profit engine is sputtering out. 

Will Alibaba recover in 2023?

Alibaba's stock looks tempting, but it's trading at such a steep discount because its growth is fading, it faces intense regulatory scrutiny in both China and the U.S., and the macro and competitive headwinds won't fade away anytime soon.

The gradual easing of COVID-19 restrictions in China might be a step in the right direction, but it definitely won't be the magic bullet that shatters the bearish thesis against Alibaba. So unless Alibaba can revive its e-commerce profit engine again -- which seems unlikely given its flat Singles Day growth this year -- its stock will continue to stagnate in 2023 and beyond.