China’s e-commerce giant Alibaba (NYSE:BABA) is down 30% over the last 12 months and has lost more than three-quarters of its value since the pandemic high in 2020. China’s slowing economy, rising competition and attempts at entering new verticals haven’t always worked out as expected. Alibaba stock could be in trouble.

Trading at such discounted valuations, investors wonder whether now is a good time to scoop up Alibaba stock cheap or will they be catching a falling knife? Amid the gloom surrounding the online retailer there are rays of light. Let’s check out what’s good behind the stock, the bad and the downright ugly before rendering a decision.

A Closer Look at Alibaba Stock

Alibaba is the world’s largest e-commerce business in terms of gross merchandise value. Its Tmall and Taobao e-commerce platforms remain the company’s primary revenue and growth drivers.

They allow it to build out its cloud services business Alibaba Cloud while also supporting Alibaba’s global expansion efforts. 

Internationally, the cross-border AliExpress unit enabled its International Digital Commerce Group to see a 44% increase in revenue to $4 billion. AliExpress itself saw 60% order growth.

The e-commerce giant also announced it would hike its share repurchase program by $25 billion, for a total of $35.3 billion through 2027. In the quarter ending March 2024, it bought $4.8 billion worth of Alibaba stock. That is the second largest share repurchase amount since going public. 

BABA Coughs and Stalls

Still, Alibaba’s business is stalling. Alibaba’s gross merchandise volume was down for the year ending in March 2023, though through the first nine months of the current fiscal year GMV nominally improved.

It was forced to scrap its spinoff of its Cainiao logistics business. Instead, Alibaba will buy the remaining portion it doesn’t own. IPO conditions are not conducive and Alibaba needs to reinforce its e-commerce business to contend with the inroads its rivals made.

Efforts to enter new verticals while restructuring its business haven’t gone according to plan.

Things Could Get Worse

Competition is fierce and only growing more intense. Alibaba is losing market share to PDD Holdings (NASDAQ:PDD), the owner of the ubiquitous Temu website.

You can’t go anywhere without the deep discount website pushing some gadget at a crazy cheap price. It was the most downloaded iPhone app in 2023, blunting Alibaba’s own expansion efforts in the U.S.

Similarly, the short-form video platform Douyin from ByteDance is expanding exponentially in China. Douyin is essentially the TikTok platform for China minus all the vapid content the latter carries.

The video site is also a growing retail e-commerce platform and growing far faster than Alibaba, JD.com (NASDAQ:JD) or PDD’s Pinduoduo, according to eMarketer.

Douyin saw a 256% increase in GMV for local life services such as restaurants, local brick-and-mortar businesses and lifestyle activity providers last year.

Having to fight a battle on two fronts, Alibaba is losing but not all hope is lost. As meteoric as Temu’s rise has been, it is not sustainable. An analysis by Wired found PDD is losing $30 on every sale it makes.

China Merchants Securities also estimates Temu is losing $588 million to $954 million a year. Essentially PDD is subsidizing Temu’s early growth in a bid to win market share but it will have to cut back eventually and raise prices. Alibaba’s efforts are much more sensible and sustainable.

The Verdict

There is no question Alibaba stock looks attractive at 13 times trailing earnings, 8 times next year’s estimates with Wall Street forecasting long-term 10% compounded annual growth for earnings.

Yet operating income is tumbling and net profits plummeted 77% from the year-ago period. The e-commerce giant has plenty of cash on its balance sheet.

However, it will be using that to invest in its various growth efforts, and Alibaba hasn’t shown yet how it will effectively fight back against the competition.

For those reasons, I’d cautiously suggest buying only a small stake in BABA stock. You can always increase your purchase on any weakness. Buying nowprevents the stock from running away from you if it should reverse course.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.