Shares of Alibaba (BABA -2.25%) rallied amid news at the start of the year that Jack Ma gave up control of Ant Group, a fintech serving as an affiliate company of Alibaba. Ma, who co-founded Alibaba, held on to his stake in Ant Group after resigning from Alibaba's board in October 2020.

Admittedly, that move could bring a considerable cash infusion to both Ant Group and Alibaba. Nonetheless, it also serves as a reminder of why investors should probably avoid Alibaba stock.

Alibaba and Jack Ma

Alibaba, the Chinese multinational technology company specializing in e-commerce, retail, Internet, and technology, was started by Ma back in 1999 and had grown into a $500-plus  billion conglomerate. Jack Ma's troubles with the Chinese government began after he stepped down from Alibaba's board in September 2019. At that point, Ma's controlling interest in Ant Group (of which Alibaba retained a 33% stake) was the only obvious influence the co-founder held over his former company.

In October 2020, Ma was speaking at a banking conference about Ant Group and its plans, and during the speech, he criticized the Chinese government's finance-related regulatory policies. China abruptly suspended the upcoming IPO of Ant Group, and Ma went into hiding. Although he has made sporadic appearances since that time, the tensions between Ma, Ant Group and the Chinese government have continued, a factor that likely led to Ma giving up control of Ant Group at the end of 2022.

Alibaba's lingering challenge

In the short term, Ma's departure could help make Alibaba stock a buy. With Ma out of the picture, it increases the likelihood that Ant Group's IPO can resume, an action that could bring Alibaba a significant cash infusion. Moreover, Alibaba seemed already positioned to benefit as China's government has also started easing up on severe COVID-19-related lockdowns in cities across the country, which had been a headwind for China's economy.

Still, the government's treatment of Ma, Ant Group, and Alibaba should also serve as a reminder of how U.S.-based investors could get the "Jack Ma treatment" and find their ownership stake in the company adversely affected by government actions. Alibaba investors in the U.S. can only own American Depositary Receipts (ADRs) and not direct shares of the company. Alibaba's particular ADR is a Cayman Islands-based company under contract to receive profits from Alibaba's assets.

To be fair, Alibaba is far from the only ADR trading on U.S. exchanges, and shares have long traded at a discount for this reason. The stock trades at about 15 times the company's trailing-12-month earnings, well under U.S. competitor Amazon's P/E ratio of around 80.

But that occurred as Alibaba's one-time rapid revenue growth slowed to a trickle. Revenue of $29 billion in the third quarter of 2022 grew by only 3% year over year. The company's $4.7 billion in non-GAAP net income rose 19% over the same period, which might make the aforementioned earnings multiple seem low.

Nonetheless, ongoing strained U.S.-China relations make Alibaba a risky choice. Between trade restrictions, SEC rules on company accounting, continued tariffs leftover from the Trump administration, COVID-19-related sanctions, and tensions with Taiwan, U.S.-China relations have deteriorated significantly. Since U.S. investors own billions of dollars in Alibaba and other Chinese shares, shareholders could become a potential target of the People's Republic and/or the U.S. government.

Making sense of Alibaba

Hence, instead of a potential Ant Group IPO making Alibaba stock a buy, it may actually validate the reasons not to buy the internet and direct marketing retail stock. Both the potential for an IPO today and the cancellation in 2020 happened on the impulse of Chinese government officials. The lack of consistent regulation makes investing difficult for shareholders.

Considering the state of U.S.-China relations, the Chinese government could direct such impulses at the American investor. This could reduce or possibly wipe out the value of these investments. Risk-averse investors should keep all this in mind and probably consider other stocks.