Alibaba, a tech conglomerate that has dominated the e-commerce business, has struggled with declining growth and increasing competition in the last two years. Despite these challenges, Alibaba recently announced plans to enhance shareholder value and two of their strategic moves could greatly benefit investors.
The Creation of “Little Babas”
As Alibaba has continued to expand its business across various industries, its size has made it difficult for management to focus on all components equally. To address this issue, Alibaba has decided to break up into six business units, allowing each one to pursue its path, including the possibility of going public separately. This could lead to greater focus, faster market response, better incentives, and ultimately, a better chance of long-term success.
Alibaba provided more details on the restructuring plan in their recent quarterly announcement, including a complete spinoff of their cloud computing business, external financing of their international e-commerce business, exploration of an IPO for their Cainiao logistics business, and execution of an IPO for Freshippo. These moves could unlock significant shareholder value, including allowing investors to directly own the top dog of the Chinese cloud industry.
Furthermore, these companies going ahead on their own, including capital funding, will free up enormous cash from Alibaba’s e-commerce business. The parent company can use this extra cash to invest in other potentially rewarding ventures or just for share buybacks. This strategic move could massively unlock shareholders’ value.
Share Buybacks to Enhance Shareholder Return
Aside from restructuring their business units, Alibaba has been heavily buying back shares lately. In the past 12 months, the company has spent $10.8 billion buying back around 129.8 million ADS shares, roughly 5% of their outstanding shares.
There are many advantages for a company to buy back its stock over time. Firstly, it will boost earnings per share (EPS), which could lead to higher share prices in the long run. Secondly, share buybacks provide a tax-efficient means of distributing excess cash to shareholders.
Moreover, share buybacks can be a prudent use of surplus cash, mainly when investment opportunities are unattractive or the company’s stock is cheap. By repurchasing shares, companies avoid making sub-optimal investments but return excess cash to shareholders. For their fiscal 2023, Alibaba generated a free cash flow of 172 billion yuan ($25 billion), which could grow even higher as they go through corporate restructuring. The company could potentially use this extra cash to generate massive value for investors through share buybacks.
The Stock Could be Rewarding in the Long Run
Alibaba’s stock price has decreased by more than 70% from its all-time-high price of $317, due to declining growth and increasing competition. However, Alibaba’s recent moves to streamline their business and repurchase shares could lead to long-term rewards for investors.
Alibaba’s stock currently trades at a low price-to-sales ratio of 1.7, compared to an average of 6.1 in the last five years. Holding the stock over the long term could be financially rewarding for investors.
10 Stocks Better Than Alibaba Group
While Alibaba’s moves to enhance shareholder value are promising, investors should also consider other options. Our analyst team who run the newsletter Motley Fool Stock Advisor have identified ten other stocks they believe are better buys. It pays to listen when the experts have a stock tip.
Lawrence Nga has positions in Alibaba Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.