Alibaba Group (BABA 0.59%) stock went public in the U.S. in September 2014 with great fanfare. As the supposed "Amazon of China," investors had high hopes that it could earn massive returns like its U.S.-based counterpart.
However, the company has fallen short of these lofty expectations. Ultimately, its performance over that time offers lessons to investors, particularly those wanting to earn outsize gains on rising stars in the stock market.
Where an IPO investment in Alibaba would stand today
If you had bought $1,000 worth of Alibaba stock on Sept. 19, 2014, that investment would now be worth approximately $1,030.
This may come as a surprise with the factors working in Alibaba's favor. Its home country of China has a population of around 1.4 billion, more than 4 times the size of the U.S., from which to draw a customer base. Also, under founder and former CEO Jack Ma, the company had gone from an apartment-run enterprise to one of the world's largest e-commerce companies.
Indeed, the company's performance did not disappoint. Its 141 billion renminbi ($21 billion) in non-GAAP (adjusted) net income in fiscal 2023 (ended March 31) was a massive increase from the 7.7 billion renminbi ($1.25 billion) reported in fiscal 2015, soon after the initial public offering (IPO).
Also, some investors likely profited from the stock. Between 2017 and October 2020, Alibaba benefited from a sustained bull run. At its peak, IPO-day investors were ahead as much as 237%.
So, what happened?
Unfortunately, China's political and regulatory environment may have doomed Alibaba's stock from the start.
For one, U.S. investors are forbidden from owning shares in Chinese companies. For this reason, Alibaba stock is not stock in Alibaba. The stock is an American depositary receipt (ADR). In this case, investors own shares in a Cayman Islands-based holding company that holds a claim to Alibaba's profits.
In fairness, this arrangement is not unique to Alibaba or even China-based companies. Alibaba peer Sea Limited is an excellent example of an ADR based in Singapore, a country which, according to some surveys, has built one of the best business environments in the world. But the ADR arrangement arguably led the stock to trade at a discount to account for this risk.
Moreover, relations with the U.S. and China deteriorated over the last few years. That may deter some American investors from buying this stock.
At one point, the strained relations manifested into an explicit delisting threat. A controversy between the U.S. Securities and Exchange Commission (SEC) and Chinese regulators led to a threatened delisting of Alibaba and other stocks last year if U.S. regulators could not gain better access to these companies' books.
Fortunately, the U.S. and China reached an agreement that avoided the delisting. Still, such challenges may plant additional seeds of doubt, and if such political battles keep occurring, more investors may simply refuse to consider Alibaba stock regardless of its value proposition.
Making sense of Alibaba stock
Given the lack of long-term returns on Alibaba stock, investors are probably wise to avoid it. But more importantly, Alibaba's history could serve as a valuable lesson for investors.
Indeed, a huge addressable market and a business's ability to capitalize on a market by growing its profits are signs that a stock could prosper over time. However, suitable political and regulatory environments are also critical, incentivizing investors to seek stocks that operate in friendlier surroundings.
