Down 24% year to date, Chinese tech giant Alibaba Group (BABA 2.17%) hasn't escaped the impacts of the 2022 bear market. Like many e-commerce companies, it faces global macroeconomic challenges like inflation and possible recession. But China-specific headwinds are another big problem, too.
Let's take a look at both of these factors and what they could mean for the company's outlook in the year ahead.
What went wrong for Alibaba?
Established in 1999, Alibaba is the undisputed leader in Chinese e-commerce, with a market share of 47%. But far from just an e-commerce company, it operates a portfolio business that includes cloud computing, traditional retail, and logistics. Alibaba's size gives it a solid economic moat against rivals through economies of scale and the "network effect," which is the value a platform gains as more people use it.
Image source: Getty Images.
The company's share price has historically reflected its business success -- rising 366% between its initial public offering at $68 per share in 2014 and its all-time high of $317 six years later. But after a strong performance in the early stages of the pandemic, a revenue slowdown and regulatory uncertainty have become big red flags for investors.
Revenue growth is slowing dramatically
Alibaba's third-quarter earnings highlight the severity of its challenges. Revenue increased by just 3% year over year to $29.1 billion, which is a sharp deceleration from the 29% growth rate reported in the prior-year period. According to management, this weakness is partially due to China's strict zero-COVID policy, which has been weighing on consumption. But this narrative might not be telling the whole story.
NYSE: BABA
Key Data Points
Strict COVID lockdowns have been going on in China for the past three years, and they didn't stop the company from posting double-digit growth rates during most of those periods. In fact, the lockdowns are widely believed to have boosted stay-at-home shopping in 2020 and 2021.
Instead of zero-COVID, Alibaba's more fundamental problem may be business stagnation and maturity. And while China is finally moving to ease some of the strictest aspects of its zero-COVID policy, the changes probably won't shoot Alibaba back to its previous growth rates.
The BBC reports that the company may be dealing with growing competition and a regulatory crackdown from the Chinese government. In 2021, Alibaba was fined $2.8 billion for antitrust violations by preventing merchants from selling on other platforms. The increased scrutiny could be making management more cautious about the tactics they use to expand.
Additional long-term challenges include U.S. trade restrictions on exporting cutting-edge semiconductor chips to China. Semiconductors help power data centers, artificial intelligence, and other technologies. And the export ban could hurt Alibaba's efforts to stay competitive in cloud computing. Revenue in the company's cloud services segment grew by 4% to 20,757 yuan ($2.98 billion), roughly 10% of total revenue.
A low valuation but risky
With a price-to-earnings multiple of 12, Alibaba trades at a significant discount to the S&P 500's average of 20. But that doesn't necessarily make its shares a good deal. Regulatory uncertainty in China is a big challenge for long-term investors. And the company's slowing revenue growth could eventually lead to stagnant profits if the situation doesn't improve. The stock looks like a sell or a hold for now.
