Is Now the Right Time to Buy Alibaba Stock?

Alibaba's (BABA -0.51%) stock price tumbled to an all-time low on Oct. 24 after Xi Jinping was confirmed for a third term as the general secretary of the Chinese Communist Party (CCP). Xi's reelection wasn't surprising, but his replacement of several moderate members of the CCP's politburo standing committee with hardline loyalists indicated China would likely retain its controversial zero-COVID policies, tightly regulate the private sector, and continue to butt heads with the U.S. 

That outlook caused investors to dump their shares of Alibaba and other Chinese stocks. But has that steep sell-off -- which drove Alibaba below its IPO price of $68 -- created a promising buying opportunity for more optimistic investors?

Image source: Getty Images.

Why did Alibaba's stock crumble?

Alibaba was once considered a promising investment on China's growing e-commerce and cloud sectors. It owned the country's largest online marketplaces, Taobao and Tmall, as well as its largest cloud platform.

Back in October 2020, Alibaba's stock hit an all-time high of $317.14 a share. But that November Chinese regulators suspended the public debut of its fintech affiliate Ant Group after Jack Ma, who founded both Alibaba and Ant, publicly criticized China's state-run banks. A month later, China's antitrust regulators started to probe Alibaba's e-commerce business.

Last April, China fined Alibaba a record $2.75 billion and forced it to scrap its exclusive deals with merchants and aggressive promotional strategies. It was also hit by smaller fines for previously unapproved acquisitions.

Those fines and restrictions coincided with a broader slowdown in consumer spending across China, which was exacerbated by unpredictable temporary COVID-19 lockdowns. The restrictions also made it easier for Alibaba's rivals, most notably JD.com and Pinduoduo, to gain ground in the crowded e-commerce market.

Alibaba initially relied on the growth of its cloud business to offset its e-commerce slowdown, but tougher competition, tighter data privacy regulations, and slower enterprise spending have also throttled that segment's growth over the past year. Alibaba Cloud's loss of ByteDance's overseas business for TikTok last year exacerbated that painful slowdown.

That's why Alibaba's total revenue growth flatlined in the first quarter of fiscal 2023 (which ended on June 30) as its adjusted net income tumbled 30% year over year. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin also dropped from its fiscal 2020-2021 levels as its higher-margin e-commerce revenue dried up and it relied more heavily on its less profitable retail segments (which include its brick-and-mortar stores, international sales, and logistics services) and its lower-margin cloud platform to offset that slowdown.

Data source: Alibaba.

For the full year, analysts expect Alibaba's revenue to rise just 6%, its adjusted EBITDA margin to remain stable at nearly 19%, and its adjusted net income to rise 56% against an easy comparison to the antitrust fine's impact on its earnings throughout fiscal 2022.

What other headwinds does Alibaba face?

Based on those expectations, Alibaba's stock looks historically cheap at 13 times this year's EPS and seven times its adjusted EBITDA. It also might seem like a bargain compared to Amazon and Alphabet, which trade at 50 and 17 times forward earnings, respectively.

Yet Alibaba faces more regulatory headwinds than its American counterparts. U.S. regulators could still delist Alibaba and other U.S.-listed Chinese stocks if they don't comply with new auditing standards, while Chinese regulators could continue to rein in Alibaba's e-commerce and cloud divisions. It will also likely be barred from expanding either business with big acquisitions.

The new U.S. restrictions on advanced chip exports to China could force Alibaba to ramp up the development of its own chips, and that pressure could squeeze the margins of its cloud division -- which still isn't profitable on a GAAP (generally accepted accounting principles) basis. The zero-COVID restrictions in China, which are set to continue as Xi's third term starts, could also continue to disrupt Alibaba's retail business.

Is it the right time to buy Alibaba?

Alibaba's valuations might look tempting at these levels, but it's still too risky to buy. Its core e-commerce and cloud businesses are languishing, and it will face intense and unpredictable regulatory headwinds in both the U.S. and China for the foreseeable future. Value-seeking investors should simply stick with beaten-down U.S. tech stocks like Alphabet instead of Chinese tech giants like Alibaba -- which could still drop a lot further before they're considered viable turnaround plays.