Alibaba Group Holding Ltd. (BABA, Financial) is one of the most popular e-commerce companies in the world. However, due to regulatory activity, it is having a tough time. These developments are impacting its business significantly and the company is expected to keep facing challenges in the months and years ahead.
These challenges are coming at a bad time for the Chinese company. Alibaba is preparing to launch its Lazada Group in Europe, beginning its expansion outside of Asia. The company's push into the European market may be a start for its global efforts, which have slowed in recent years due to the tough competition from Amazon (AMZN, Financial) and Tencent (TCEHY, Financial), among others.
However, it will be tough for investors to give Alibaba a chance when the company continues to face regulatory issues, which have dogged them since last year. Known for its innovative and disruptive business practices, the company has grown into a juggernaut, which has led to increased scrutiny from regulators. The $2.8 billion record antitrust fine imposed last year was historic. While it is not the only company facing increased regulatory activity in China, it is the largest company to be fined so far.
And the regulatory issues are not going away.
These issues have led to Alibaba's stock price stagnating, and investors have become wary of the company. The e-commerce player is still a large and powerful force in the tech world, but it faces an uncertain future. It is unclear when or if Alibaba will regain investors' trust, but it seems unlikely that they will return to the stock anytime soon.
Thorny regulatory activity is hurting Alibaba
Once the undisputed king of Chinese tech, Alibaba is now in the country's regulators' crosshairs. The company, which owns the world's largest e-commerce platform, has come under fire for various reasons. The Chinese government's crackdown on the tech industry is not surprising, as there have been increasing calls for regulation in recent years. There is a concern that companies are becoming too powerful with the continued growth of this sector. Alibaba is just the latest casualty in this regulatory crackdown, and it remains to be seen how this will affect the company in the long run.
Most notably, Beijing derailed Ant’s blockbuster initial public offering two years ago. The government ordered the group to restructure its operations and make changes to meet its standards. Ant has had no choice but to change its business model by selling stakes and shrinking some operations. However, there is a further twist in the story.
Jack Ma is reportedly stepping down from his position at Alibaba. Ma has been thinking about this for some time, and Ant broached the change in conversations with regulators last year. But Ant will have to hold off on its IPO for at least one year and potentially as long as three. If a controlling shareholder suddenly changes, it can take a company up to three years on the mainland before going public. Hong Kong only requires a one-year hiatus.
On the other hand, Chinese companies like Alibaba have also faced scrutiny in America. Recently, Alibaba was among the U.S.-listed Chinese companies that were selected for audit inspection by U.S. regulators starting next month, people with knowledge of the matter said. The move comes as Washington ratchets up scrutiny of Chinese companies listed on American stock exchanges amid concerns about their accounting practices and governance standards.
Slowing growth is not helping matters
Alibaba has been one of the major beneficiaries of the pandemic as people turned to online shopping in droves. However, now that the virus is under control in many parts of the world and people are returning to their normal lives, Alibaba's business has begun to slow down. To cope with this new reality, the company is cutting down staff and streamlining operations.
The e-commerce giant experienced its first quarterly drop in sales recently. Alibaba’s performance in the second quarter was largely due to its China commerce division. Compared with last year, it fell 1%. This drop can be attributed to both Covid-19's resurgence and Shanghai lockdowns. In response, the latest financial reports indicate the company cut nearly 10,000 jobs, or around 3.8% of its workforce, during the quarter.
Amazon is also dealing with a similar situation. However, the regulatory crackdown makes it more worrying for Alibaba.
Takeaway
Alibaba's dominance in China's e-commerce market cannot be disputed. However, it has been hampered by Covid lockdowns in China, which have prevented it from operating at full capacity. Authorities in China have recently cracked down on leading technology companies, while the U.S. government has threatened to delist Alibaba from the New York Stock Exchange.
Despite these challenges, Alibaba remains a powerful force in the tech world and its long-term prospects remain strong. In the short run, though, the stock will remain under pressure for a few more quarters until the dust settles on its regulatory activity.
