Yahoo Finance $200 Million Insider Bet, Massive Buybacks Point to an Alibaba Revival
Alibaba Group Holding Ltd. (NYSE:BABA) has witnessed a substantial drop in its stock price for more than three years, primarily driven by the sudden suspension of Ant Group's highly anticipated $37 billion initial public offering and the implementation of strict regulatory measures on prominent Chinese tech companies in late 2020.
Global economic headwinds and a noticeable deceleration in the company's growth momentum further exacerbated the situation. Alibaba's stock plummeted by an astonishing 76% from its peak in October 2020.
Over the past two years, the company has grappled with a deceleration in revenue growth attributable to widespread economic headwinds and intensifying market competition.
Yet, the evolving regulatory climate has primarily driven the sharp downturn in its share price. This period of regulatory uncertainty took root with the abrupt cancellation of Ant Group's IPO and deepened with the reversal of IPO plans for its other subsidiaries.
However, these developments have significantly impacted investor confidence, leading to adisproportionate focus on regulatory challenges over the company's operational performance and growth prospects.
Lastly, Alibaba is embarking on a remarkable comeback journey marked by rising revenue, improved margins and a growing global presence.
A strategic $200 million vote of confidence amid market challenges
The co-founders of Alibaba, Jack Ma and Joe Tsai, showed confidence in its long-term potential as they collectively invested $200 million to purchase additional shares, signifying their belief in the company's resilience and prospects.
Previously, Ma's family trust announced its plan to sell 10 million shares in November 2023, an arrangement made with a broker at a price set in August 2023 for thee fund requirement to invest in agricultural enterprises and charities.
On the contrary, Ma's conviction in Alibaba has been reaffirmed through his recent purchases of company shares, solidifying his position. Specifically, he invested $50 million in Alibaba's shares listed on the Hong Kong Stock Exchange, while Joe Tsai committed $151 million via his Blue Pool Management family investment vehicle to the company's shares traded in the U.S.
The stock purchases by the founders are significant as they signal their belief in the long-term potential of Alibaba amid a challenging market environment. Hence, this move is expected to boost investor confidence and market sentiment toward the company and the broader tech sector in China.
Unsurprisingly, following the news, the company's shares gained 8% and volume increased by 94.20% to 53 million on the New York Stock Exchange.
Additionally, Ant's IPO now shows the possibility of a reboot after the company conducted corporate governance optimization at the beginning of 2023, reducing Ma's voting rights to about 6.20% from his earlier 53.50% holding.
As per the domestic market rule, companies cannot go public domestically on the country's A-share market if they have had a change in control in thepast three years for Hong Kong's stock exchange; the waiting period is one year. Hence, Ant now has more potential to go public as the issues with the shareholding structure have been resolved and confirmed by the country's central bank.
Currently, many catalysts for Alibaba are underappreciated in the market, which signifies an undervalued opportunity. The company continues its share buybacks and expands shareholder returns, displays a recovery in revenue growth with a steady margin and awaits potential value-unlocking opportunities through its subsidiary Cainiao's IPO, which is still a work in progress, and new hope for Ant's IPO.
Meanwhile, the Chinese monetary authorities' continuing expansionary policy with the recent cut in reserve requirements and a stock market stimulus package is bringing new impetus to the overall market, and Alibaba is trading at a depressed price.
Alibaba's billion-dollar buyback: A confidence boost for shareholders and EPS growth
Alibaba announced its fiscal third-quarter earnings earlier this week, beating and raising $36.67 billion in revenue and adjusted earnings of $2.67 per share for the three months ended Dec. 31. Despite the modest constant currency top-line growth of 5% and U.S. dollar terms of 2.10%, the stock experienced a pre-market rally that could be primarily associated with the announcement of the massive buybacks.
In its latest fiscal quarter, the company showcased resilience and strategic growth. It reported a 3% year-over-year increase in cloud intelligence revenue to approximately $3.95 billion, emphasizing a shift toward high-quality revenue streams. Despite retracting plans to spin off its cloud business amid U.S. export restrictions, Alibaba is realigning its operations, which is evident in the recent restructuring into six units and the new management team for Taobao and Tmall Group, which saw 2% revenue growth to $18.18 billion.
The conglomerate's core e-commerce sector demonstrated robust performance, with online gross merchancise value witnessing healthy growth, driven by increased transacting buyers and order volume. The Chinese retail and wholesale commerce businesses grew by 1% and 23% year over year, respectively. International Digital Commerce surged by 44%, while Local Services Group and Cainiao Smart Logistics Network saw revenue grow by 13% and 24%. The Digital Media and Entertainment segment also experienced an 18% revenue increase, showcasing the company's successful diversification and strategic focus on operational efficiency and global market expansion.
Source: Alibaba's third-quarter report
The company's shares had been volatile, with a 52-week low of $67, but the insider purchases by Ma and Tsai gave the stock fuel to make up the difference. Alibaba has reported a free cash flow of nearly $24 billion over the past year, with nearly half of those funds returned to its investors through roughly $9.50 billion in stock repurchases and $2.50 billion in dividends paid out in January 2024. Hence, the company is preparing for a highly aggressive reinvestment and, therefore, the redeployment of expectations concerning how aggressive its stock buybacks will be.
That said, even as it poured another $25 billion into its repurchase program, taking the total to some $35 billion with a deadline of March 2027, management mapped a path to reduce the net share count by 3% per year over the next three years. The $25 billion offers a 13% buyback yield, which can support and boost Alibaba's stock over the long term.
Through such good and salient buybacks and dividend payouts, the company, with an emphasis on shareholders' value, shows a consistent effort to enrich its investors through its comprehensive approach. With a strategic growth-oriented focus and some operational shifts, Alibaba's overall effort indicates a multi-sided approach to maintaining and improving future shareholder returns.
The potential IPO of Cainiao Smart Logistics and China's big stimulus may unlock valuation
In August, Cainiao Smart Logistics, a subsidiary of Alibaba, made a strategic move by filing for an IPO on the Hong Kong Stock Exchange. This IPO holds the potential to elevate Alibaba's valuation given Cainiao's impressive track record of robust revenue growth and improving margins.
Notably, while Alibaba reconsidered and ultimately decided against spinning off its cloud segment, the IPO for Cainiao is in progress. On Nov. 14, China's securities watchdog asked Cainiao to submit additional information about its shareholders and operational structure, indicating the IPO potential is still alive.
The logistics giant aims to raise at least $1 billion, depending on the prevailing market conditions. After the proposed spin-off, Alibaba intends to maintain a controlling interest in Cainiao, with ownership of over 50% (Alibaba currently holds approximately 70% of Cainiao).
Leading financial institutions China International Capital Corp. (HKSE:03908) and Citigroup Inc. (NYSE:C) are partnering with Cainiao to facilitate its initial share sale. With an approximate valuation of $20 billion, Cainiao's robust financial standing is evident from its $12.4 billion revenue recorded over the 12 months up to September 2023. Further highlighting its financial vigor, Cainiao's adjusted Ebita margin has significantly improved, climbing to 4% in the second quarter of 2024 from just 0.7% in the same quarter of 2023, a testament to its growing operational efficiency and profitability.
If and when it happens, the confirmation of the Cainiao IPO may give a new boost to the stock price, as it did when Alibaba planned to split into six groups. After the split announcement, Alibaba's stock price went up by 14.30% from the previous day, and trade volume rose by 551.10%, indicating investors' rejuvenated optimism until the company decided to walk back on the plan. The Cainiao IPO has the same potential to boost the stock price when the market gains a sense of certainty over the listing.
Meanwhile, Chinese authorities are considering plans to stimulate the equity market, which has gone through a series of setbacks over the last few years. The policymakers seek to inject $278 billion from the offshore accounts of Chinese state-owned enterprises as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link.
Moreover, expansionary monetary policy by the central bank, as continued by the recent cut in reserve ratio requirements by 50 basis points, which will free up $140 billion, will further boost the capital market, making way for unlocking the valuation of many high-quality stocks, including Alibaba, which has gone through an extended depressed period. Hence, the expansionary monetary policy will work as a catalyst for the company's business.
Takeaway
Amid regulatory challenges and market volatility, Alibaba Group has demonstrated remarkable resilience, underscored by co-founders Ma and Tsai's significant share purchase, signaling strong confidence in the company's future. This move, along with a substantial buyback program, highlights Alibaba's commitment to shareholder value and its strategic vision for growth. Despite a historic stock price decline, Alibaba is on a path to recovery, driven by operational realignment, potential IPOs of its subsidiaries and favorable monetary policies. These factors collectively signal Alibaba's readiness to leverage its strengths for a robust comeback and long-term success.
This article first appeared on GuruFocus.
