The Chinese technology giant Alibaba (BABA -1.93%) has fallen from grace. 

As of this writing, the stock trades at around $94, just 38% above its IPO price in 2014. That's despite the fact the company has grown its annual revenues from $8 billion in fiscal 2014 to $126 billion in fiscal 2023 (which ended March 31). Consequently, the stock now trades at close to a historically low price-to-sales multiple of 2, much lower than its five-year average multiple of around 6.

That low valuation is sure to attract bargain hunters, but before you jump in, it's crucial to understand how the stock got to this point in the first place. Only then can you make an educated prediction of where it could go next.

From hypergrowth to stagnation

Alibaba has been an exemplary Chinese growth company. Since going public in 2014, it has grown its revenue at an annualized rate of more than 35%.

But after its growth streak started to slow in fiscal 2022 with the top line up 19%, this most recent year really saw the wheels fall off with revenue up a meager 2%. Many things contributed to that weak performance, including competition from Pinduoduo and Douying, and the adverse effects of extended COVID-19 lockdowns.

But beyond those external headwinds, Alibaba's massive size and complex operations have made the company difficult to manage. Its enormous business empire now spans e-commerce, logistics, cloud computing, entertainment, overseas businesses, and more. Perhaps understandably, smaller and nimbler competitors like Pinduoduo have been eating Alibaba's lunch.

To get Alibaba back on track, its leadership team has decided to break down the conglomerate into six different business units, each with its own independent management team. The intent is to reduce bureaucracy, improve focus and incentive management, and ultimately bring back the entrepreneurial spirit the company will need for its next phase of growth.

While this corporate restructuring is still in its early days, there are reasons to think it could lead to better times for the company.

The market is highly pessimistic about Alibaba

Alibaba's stagnant growth understandably hasn't sat well with investors, but that's not the only thing they're worried about.

Over the last few years, the company has also faced scrutiny and interference from the Chinese government. Officials in Beijing blocking the planned spinoff and IPO of its Ant Group subsidiary, and regulators levied massive antitrust fines on the company. The threat of Alibaba stock being delisted from U.S. exchanges for failing to meet audit requirements, and an enormous sell-down by its biggest shareholder, Softbank, only added to the company's headaches in the past year.

Some of the issues mentioned above will likely continue putting pressure on Alibaba's stock for a long time, while others will only have short-term effects. For example, the downward pressure caused by the ongoing sale of Softbank's shares should eventually ease up as its ownership stake has shrunk from about 24% in July 2022 to less than 4% in April this year, according to the Financial Times.

Meanwhile, the delisting threat could linger depending on how long it takes for the SEC to fully resolve its audit issues with Chinese companies. The good news here is that both parties have made progress. The Chinese government agreed last year to allow its domestic companies' audits to be reviewed by the U.S. Public Company Accounting Oversight Board, which has already conducted its first-round review. However, those checks revealed major deficiencies in many of the Chinese audits.

In short, it could be some time before investors become more comfortable with holding Alibaba (and Chinese companies in general).

What it all means for investors

To improve investor confidence in Alibaba, the company must first demonstrate its ability to return to growth mode. Its recently initiated corporate restructuring is a good start, but that leaves much more work to be done. Investors should monitor how the company executes on its goals in the coming months.

How long the broader negative sentiment toward Chinese companies persists, on the other hand, will depend on external factors such as the strained relationship between the U.S. and China. These factors are beyond Alibaba's control, so investors should focus on how well it handles its internal issues.

If Alibaba can demonstrate sustainable progress in its turnaround effort, that should improve investors' sentiment, triggering a recovery in its valuation, especially if the other pieces also fall into place.