Alibaba has been on a selling spree.
In March this year, Alibaba sold 30.85 million ADRs of the streaming platform Bilibili (NASDAQ: BILI) at US$11.60, raising proceeds of US$357.8 million.
In the same month, Alibaba sold 33 million ADRs of electric vehicle maker Xpeng (NYSE: XPEV) at prices between US$9.60 and US$9.75, raising about US$317 million. Separately, Alibaba also sold 25 million of Xpeng’s shares in December 2023. Alibaba still holds 6.65 million shares in Xpeng, which I expect will eventually be sold too.
Just a few days ago, Alibaba sold its entire 26.5 million share stake in the e-commerce enabler Baozun for US$21.8 million, or US$0.82 per share (US$2.46 per ADR).
These are the names that have been covered by the media, but Alibaba sold other stocks in the first quarter of 2024 too:
- Hello Group (NASDAQ: MOMO) for US$55.6 million – Dating app
- Perfect Corp (NYSE: PERF) for US$17.8 million – Virtual beauty and fashion with augmented reality
- 1stdibs (NASDAQ: DIBS) for US$7.77 million – Online marketplace for furniture, art, jewelry, and fashion
- 23andMe (NASDAQ: ME) for US$1.53 million – DNA test kit
Taken together, Alibaba has sold US$779.3 million worth of US-listed securities this year. We can expect more selling as there are additional similar financial assets held by Alibaba, as shown in the table below. These assets would fetch another US$154 million if sold at current prices.
Why is Alibaba selling?
It’s definitely not because Alibaba needs cash. The company holds US$70.784 billion in cash and treasuries, which is about 37% of its market cap and more than its US$24 billion debt. Additionally, the business generated US$21 billion in free cash flow in FY2024, so liquidity is certainly not a problem.
One clue might come from why Alibaba borrowed US$5 billion via convertible notes—the reason given was to fund share buybacks. I explained the deal in this video.
Alibaba has been conducting share buybacks in recent years, spending US$9.5 billion in 2023 alone. The company appears poised to increase its buyback efforts even further. This suggests that management believes Alibaba is significantly undervalued. We can infer this from the conversion price of US$105.04, indicating that Alibaba’s shares should be worth at least this amount. This represents a minimum 34% discount to the current price of US$78.34.
It makes a lot of sense to buy back shares when prices are low. This strategy creates shareholder value by increasing the per-share value as the number of shares decreases. Additionally, share buybacks support the share price by creating additional demand, supplementing the usual market buying and selling activities.
The second reason for Alibaba’s selling spree is that its business has not been performing well in the past few years. Beyond the regulatory impact, which has now subsided, Alibaba has faced intense competition from PDD and Douyin. Its core China e-commerce segment is at stake, and Alibaba needs to focus on defending its market share. Another key business segment, its cloud division, which was supposed to be a major revenue driver, has only managed single-digit revenue growth. Alibaba cannot afford to lose ground in its key businesses, and selling some of these investments will help sharpen its focus.
A year ago, Alibaba Group restructured into six business units while still under Daniel Zhang’s leadership. However, the strategy seems to have changed under the new management. Today, only three business units are considered core: the Taobao Tmall Business Group (China e-commerce), the Global Digital Business Group (international e-commerce), and the Cloud Intelligence Group (Alibaba Cloud).
The initial idea was to gradually spin off the business units, but we have yet to see any action on this front, further indicating that the new management has a different plan. I believe that the three core business units will not be spun off, but the remaining three are potential candidates for divestiture.
Potential Divestitures
The Digital Media and Entertainment Group is the weakest link in my view. Alibaba has never been strong in entertainment and pales in comparison to Tencent. It would be better off selling its stakes in this unit, as it doesn’t add value to its e-commerce or cloud business.
The Local Services Group includes the food delivery platform Ele.me. Again, Alibaba is not a market leader in this aspect, and Meituan is the undisputed leader. Its Fliggy travel app also lags behind Meituan and Trip.com. Alibaba has no significant business in this space, and this unit has no synergy with its core businesses.
The only grey area is Cainiao, the logistics arm of Alibaba. It could be spun off, as the business economics and operations are different from an e-commerce platform. Alibaba could still use Cainiao’s services even if they were separate companies. However, if Alibaba believes that fast delivery and fulfillment are crucial, there might be a reason to keep it closely controlled to add value to its e-commerce services.
Streamlining and Refocusing
Alibaba is almost a mirror image of Amazon, as both have e-commerce and cloud as their core businesses. They have expanded into logistics, owning networks of warehouses, and ventured into physical retail. Additionally, Amazon has made significant investments in entertainment, most notably with its acquisition of MGM. However, Amazon hasn’t found success in all these areas and has faced its own set of struggles. Amazon was probably better off only because it wasn’t scrutinized by authorities as much as Alibaba. This means that Alibaba does not and should not copy everything Amazon does.
Alibaba grew significantly during the good times under its previous CEO, who ventured into and acquired many businesses. To be fair, it wasn’t only Alibaba doing this; the easy availability of money and lax regulations led to wasteful behavior across the board. Now, as every company is tightening its belt, it is timely for the new management to clean up and refocus the business.
I believe more investment sales are coming, not just of US stocks, but also of its investments and subsidiaries in China. The management is on the right track. With more cash and resources devoted to their core businesses, they will have a better chance to remain the leader, and the share price should reflect the improving health of the company.
Support for the stock is between HKD73 and HKD75. Shouldn’t fall to below HKD70, even if this occurs, shouldn’t be below HKD70 for long if the company is doing share buybacks.