Markets are teaching a tough lesson to investors who held onto the belief that Alibaba Group (NYSE:BABA) would stop falling. BABA stock closed at around $145 recently, the lowest level in three years.

That Alibaba is half the price from yearly highs would not justify the stock being on sale. Late last year, markets priced in the value of an Ant Financial initial public offering. But regulators quashed those dreams. After facing more fines and further regulatory hurdles, Alibaba shares experienced further downside.

BABA Stock in Freefall

Disillusioned BABA stock holders need to weigh the political risks offsetting the steep value in this e-commerce giant.

The last few years saw Alibaba enjoy tremendous growth in the online retail market. It pivoted its desktop shopping user base to the mobile platform. It expanded its services by building on the multiformat business model. For example, it serves a wide range of customer needs in the grocery market. Freshippo and Taoxianda offer one-hour doorstep product delivery for groceries bought from its Tmall supermarket.

Last year, Freshippo adapted to the pandemic to sustain delivery services. In the last quarter, its retail and other revenue grew by 82% year-over-year. The unit benefited from the growing direct sales model from Tmall Supermarket and Hema.

Despite the fundamental strength, BABA shares are falling because of the regulatory overhang.

Beijing Pressures

Alibaba faced pressure from the Chinese government to sell Mango Excellent Media, a unit of state-run Hunan TV. Selling its 5% stake for around $600 million, that was around 38% less than the price originally paid. Mango is among the company’s biggest state-owned media assets. The sale weakens Alibaba’s ties with the government, which is bad news. The more distant the firm gets from the central government, the less strategically important it becomes.

The sale, at a loss, destroys shareholder value. Previously, Alibaba pledged a generous $15.5 billion to help China achieve common prosperity. This initiative is President Xi Jinping’s campaign to contribute to the realization of common prosperity through high-quality skills development. Tencent (OTCMKTS:TCEHY) dedicated $7.7 billion to the initiative the previous month.

Before that, China slapped Alibaba with a record antitrust fine of 18.2 billion CNY ($2.81 billion). At the time, BABA shares rallied sharply on the speculation that the firm would face no further scrutiny. Yet week after week, China is reshaping policy. Whether it is enforcing data privacy or limiting gaming hours for kids, Alibaba is on the receiving end of the punishment.

Fair Value

The more Alibaba shares fall, the bigger the upside. Shareholders also lose more on paper when this happens. Analysts have an upside price target ranging from $190 to $336, according to data collected by TipRanks. At an average price target of $265, readers must scrutinize the over 80% upside potential.

Analysts are unwilling to reiterate anything other than a “buy.” Too many mutual funds hold Alibaba stock. Many exchange-traded funds hold this stock to track the major indexes. Setting a buy or hold warning is risky at this time. China could stop introducing new regulations. It could stop ordering Alibaba to pay fines or sell its investments. That would end the drop in Alibaba shares.

Evergrande Cloud

Property management firm Evergrande is an indirect macroeconomic risk that investors cannot ignore. The property giant owes $300 billion in debt. It negotiated the interest payment due last week to domestic investors. The bad news is that the firm stayed silent on an interest payment due to foreign investors.

Evergrande and the government are signaling that it will let Western investors lose interest payments and potentially the debt. This will trigger bankruptcy in some form. China will not allow Evergrande to stop its housing development indefinitely. It will force the company to resume work, even if foreign investors sue on the non-payment of debt principal and interest.

Alibaba investors need to worry about the economic fallout from Evergrande winding down. Millions of people could lose their homes. Suppliers who have not been paid in months will have no disposable income. The weak real estate market will lower consumer confidence. This could hurt spending levels on Alibaba’s platform.

Investors may have a glimmer of hope. China’s Singles’ Day celebration is on Nov. 11 (11-11). This is usually the biggest day of the year for Alibaba. It could reverse the negative sentiment hurting the stock.

The one-day event is not enough of a catalyst to rate Alibaba as a stock to buy. After falling, the stock may eventually find a bottom.

On the date of publication, Chris Lau did not have (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.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.