Alibaba: The Chinese government has sent a clear message to all investors. Is it still worth investing here?

Alibaba Group Holding is one of the most innovative companies in China. Not only has it grown to incredible heights over the past two decades, but it has also provided plenty of opportunities for investors. Despite its great success, however, the company has faced some major challenges recently.

Alibaba Group Holding Limited

Why has Alibaba's stock fallen?

Alibaba $BABA has long been a pioneer in e-commerce, with millions of buyers and sellers flowing into its retail platforms. However, the company's rapid growth in recent years has led to increased scrutiny as critics have pointed to its lax approach to privacy standards and other issues. Many now see its recent problems stemming solely from this regulatory pressure, with politicians and watchdog groups cracking down on Alibaba's practices to protect consumers and preserve the integrity of the industry.

Regardless of how this situation plays out, one thing is clear: Alibaba faces serious regulatory challenges.

Five-year BABA stock price chart

The U.S. has been pressuring Chinese companies listed on its exchanges to share their audit working papers with the country's authorities forsome time. The Chinese government has so far resisted these demands, but recent developments suggest that may be changing.

Both China and the U.S. have agreed to proceed with the audit process, and Alibaba is one of the first companies expected to undergo the process. While Alibaba shares have already suffered due to speculation surrounding this development, the actual audit is expected to take several months. Any further speculation about the company's compliance will hurt its stock price.

On the domestic front, China fined the e-commerce giant $2.8 billion after an antitrust investigation in 2021. The record fine came after the cancellation of the blockbuster initial public offering of Ant Financial (now known as Ant Group) in 2020. Alibaba is taking steps to ensure it remains compliant with domestic laws, but recent regulatory activity has certainly dampened investor sentiment toward the stock.

Get ready for more closures

Just a few days ago, China had already imposed new travel restrictions in some of its major cities to prevent the spread of Covid-19 there. Rather than relaxing Covid restrictions - as some had hoped before the five-year leadership turnover of the Communist Party - Chinese authorities tightened them after Xi Jinping endorsed the strategy across the board .

"The 20th Party Congress did not provide a timetable for moving away from the zero-Covid policy. Instead, it stressed the importance of sticking to the current approach," said Yanzhong Huang, senior fellow for global health at the Council on Foreign Relations in New York.

The renewed fervor for the policy can be seen most clearly in smaller cities. While metropolises like Beijing and Shanghai can draw on their experience with large outbreaks to implement more targeted blocking measures, smaller cities without such know-how tend to pursue zero-Covid targets more aggressively and broadly, Huang said.

Geopolitical pressures aren't going away either

Investors would be wise to keep a close eye on any further developments in the ongoing dispute between the world's two largest economies. Alibaba and other Chinese companies have suffered massively in light of the Biden administration's recent decision to limit semiconductor chip exports to China.

One of Alibaba's drawbacks is that its artificial intelligence projects rely on chips designed by Nvidia and Intel. Given the latest White House restrictions on chips, which were introduced earlier this month, questions have been raised about whether Alibaba would be able to implement its latest AI projects and bolster its cloud computing capabilities, as China is not known for designing and manufacturing high-end chips.

In addition, there is always the possibility that as relations deteriorate, the US Department of Defense could follow its warning and list Alibaba and companies like it as Communist Chinese military companies, something it backed away from in 2021.

With this in mind, it is conceivable that Alibaba's AI and cloud computing initiatives could be at risk. Worse for the company is that the cloud business was one of the few major positives from the last Q1 report, as it generated $2.6 billion in revenue, a 10% year-over-year increase, while the core business showed no growth in the period. As a result, with further geopolitical headwinds, there is a risk that it will not be able to perform as well in the future due to its reliance on Western components, which will be more difficult to obtain in the foreseeable future due to the deterioration in Sino-US relations.

Conclusion

After the recent weakness, Alibaba shares have not become a bargain in my view, even though the fundamentals suggest so. We shouldn't forget that after Beijing launched a crackdown on the company, its share price fell into troubled territory, prompting Alibaba bulls to argue that the business is now undervalued. However, this hasn't helped the stock's recovery, as the stock continues to fall in value to this day and is currently trading below its 2014 IPO level.

Given this, it is safe to assume that such a rebound is unlikely to happen today as Beijing has made it clear to the world and the markets that it intends to strengthen its control over the Chinese private sector. This would undoubtedly have more negative consequences for Alibaba in the foreseeable future, as it is unlikely that the company will be able to outperform the state in sectors where Beijing has already become a direct competitor of the company. I therefore stand by my view that Xi Jinping's China has become uninvestable.

DISCLAIMER: All information presented here is for informational purposes only and is in no way an investment recommendation. Always do your own analysis.