The Alibaba (NYSE: BABA) share price has dived 56% over the past 12 months. I have been pretty shocked by this performance. Investors have been selling the shares in droves even though this e-commerce giant has continued to report impressive revenue growth.
Indeed, for the quarter ended September 2021, the company reported year-on-year revenue growth of 29%.
Booming market
That is not all. As the group controls around 50% of the Chinese e-commerce market, it should be able to piggyback on the industry’s growth over the next five years. The Chinese e-commerce market is expected to grow at an annual growth rate of 12.4% over the next four years.
Unfortunately, the situation is a little more complex than this. Suppose it was just a case of analysing the potential for growth in the Chinese e-commerce market over the next five to 10 years. In that case, I think investor sentiment towards the Alibaba share price would be significantly better than it is today.
It seems as if there are a couple of other reasons why investors are avoiding the shares. The biggest appears to be the changing regulatory environment throughout China. The country’s “common prosperity” drive and the recent regulatory crackdown has rocked the region’s technology sector.
Alibaba has announced it will be investing $15.5bn to enhance common prosperity over the next four years. Put simply, this means the company will be giving away the money.
Spending $15.5bn on government initiatives will almost certainly impact on the group’s growth. It is money the company cannot use to pursue its own ambitions.
Alibaba share price risks
At this point, there is no telling if the government will demand yet more from Alibaba. There is also no telling if government regulators will intensify their attack on technology enterprises like this one. In 2021, regulators slapped a $2.8bn fine on the business for anti-trust issues. And another penalty was issued earlier this year.
These challenges illustrate why investors have been avoiding the Alibaba share price. While I believe this business is one of the best ways to invest in the growing Chinese e-commerce market, I am incredibly concerned about the issues outlined above.
If the company has to foot the bill for further fines and common prosperity initiatives, it will struggle to maintain its market share and capitalise on the wider market growth.
And if the business loses market share over the next few years, the enterprise will be worth less in the future than it is today.
As such, it is too difficult for me to place a value on the Alibaba share price based on what I know right now. For that reason, I will continue avoiding the company, at least until there is some more clarity on regulators’ intentions.
