The Alibaba (NYSE: BABA) share price has plunged a staggering 30% this year. The stock is off around 70% after these losses over the past 12 months.
Shares in the Chinese e-commerce giant have come under pressure for several reasons. The decision by Chinese policymakers to start clamping down on high-flying technology groups sparked the sell-off. Since this threat emerged, investors have been struggling to digest other risks to the company’s growth potential.
These include everything from additional regulations, the trade war between China and the US, and competitive forces in the global technology market.
However, despite these challenges, the company remains one of the largest e-commerce groups in China. It is also investing heavily in new growth initiatives, such as cloud computing.
Considering these tailwinds, I have been trying to evaluate if it is worth adding the stock to my portfolio after recent declines.
Alibaba share price risks
While the company might look cheap compared to its potential, the Alibaba share price is not a traditional investment. The stock is traded through what is known as a Variable Interest Entity (VIE).
This structure allows Western investors to own part of a Chinese business although they do not actually own a piece of the underlying business. Instead, they own part of a network of offshore entities, which have a claim on the underlying company’s profits.
The problem with the structure is that it is not legal. Nor is it technically illegal. It is a grey area. And this is another reason why the market has been avoiding the stock over the past 12 months. There is some concern that the structure could fall foul of regulations.
This is the primary reason why I have always stayed away from the Alibaba share price. If Chinese regulators wanted to cut the company off from New York, they could do so at a moment’s notice. While I think this is unlikely, it is a risk I need to consider before investing.
I have also been considering the general regulatory environment for the tech sector worldwide. This is shifting and technology companies are having to work to appease regulators. Ultimately, I believe this will lead to lower returns for investors.
Opportunities ahead
That is not to say these companies have a bleak future. I believe businesses like Alibaba will be able to capitalise on the growing demand for e-commerce and e-commerce products worldwide. It already has the logistics to capitalise on this growth. Competitors may struggle to replicate this advantage.
What’s more, the business has a strong balance sheet and is generating vast amounts of cash. These resources can be used to further the company’s expansion and grip over its core markets.
Still, while I think the business does have some desirable qualities, I cannot get the regulatory threats out of my head. There is no telling how regulators in China and the US will react over the next 12-24 months. On that basis, even though the stock looks cheap compared to its past trading history, I am not in a rush to buy the shares.
I would rather sit on the sidelines and see how the regulatory environment evolves over the next couple of years. I do not think the stock will recover from its losses any time soon.
