2023-03-30 00:45:30 ET
Summary
- Alibaba spent $3.3 billion on share repurchases in the previous quarter which allowed the company to buy back 1.75% of outstanding stock.
- The company has another $21 billion in current authorization to buy back shares which would expunge 10% of outstanding stock at current price.
- Alibaba has healthy free cash flow which should allow further ramp-up of buybacks and lead to better EPS despite slower overall growth in revenue.
- The fundamentals of the company are quite strong with good progress in international regions and many important segments within China.
- Long-term investors can receive better returns as Alibaba delivers EPS growth through buybacks while investing in businesses with longer growth runways.
Alibaba Group Holding ( BABA ) is ramping up its buybacks to invest the surplus free cash flow generated by the company. In the recent quarter, the company invested $3.3 billion in share buybacks which expunged 45 million ADSs out of 2.6 billion outstanding ADSs. This equates to a buyback of 1.75% of outstanding stock in a single quarter or 7% on an annualized basis. The company has another $21 billion in current authorization to undertake new buybacks. Alibaba is following the example of other big tech companies like Apple ( AAPL ), Microsoft ( MSFT ), Alphabet ( GOOG ) (GOOGL), and Meta ( META ) which are focusing on buybacks to deliver robust EPS growth.
At the same time, the fundamentals of the company are quite strong despite slower growth in the recent quarter. The company is making a higher investment in international business in Southeast Asia, Turkey, and other regions which should give it a better growth runway in the future. The opening up of the Chinese economy after Covid restrictions should also be a tailwind for Alibaba’s future growth trajectory. The higher buyback rate and strong fundamentals of Alibaba can help BABA stock deliver good returns over the long term, making it a solid buy-and-hold stock.
Joining the buyback trend
Alibaba has joined the buyback bandwagon and is reporting buyback pace similar to other big tech firms. This has helped the company expunge a significant chunk of its outstanding stock. In the current buyback authorization, Alibaba has another $21 billion left which is equal to 10% of the value of outstanding stock.
Ycharts
Figure 1: Buyback rate of big tech stocks over the last year. Source: YCharts
Apple has been the leader in this buyback trend. It started with buybacks a decade back and since then it has invested over half a trillion dollars in repurchasing its own stock. This has allowed the company to expunge 40% of outstanding stock and give an average annualized boost of 5.2% to the EPS on a standalone basis.
Alibaba Filings
Figure 2: Share repurchase data reported by the company in the recent quarter. Source: Company Filings
Alibaba also has a very healthy free cash flow business and it could certainly divert a big chunk of these resources into buybacks.
Strong fundamentals
Buyback alone is not sufficient to drive the stock price higher. We have seen many examples in the past where massive buybacks have failed to improve investor sentiment. Alibaba would need to show good fundamentals to deliver better long-term returns on the stock. One of the key strategies of Alibaba’s management has been to focus on international business. This allows the company to improve its growth runway and also hedge against any regulatory setback in China.
Alibaba Filings
Figure 3: YoY growth has been a lot higher in International commerce compared to China commerce. Source: Company Filings
In the previous quarter, the International commerce segment reported YoY growth of 18%. Some of the subsidiaries controlled by Alibaba like Lazada in Southeast Asia and Trendyol in Turkey are showing a very good growth trajectory. These international businesses can grab market share from other local competitors due to the strong financial and technical support of Alibaba. Sea Limited ( SE ), Lazada’s main competitor in Southeast Asia has seen 80% erosion in market cap due to massive losses. This reduces the competitive pressure on Lazada and should allow the company to improve market share and margins.
Lazada reported Gross Merchandise Value, GMV, of $21 billion in the previous fiscal year. Alibaba has set a target of $100 billion in GMV for Lazada. This shows the growth potential of international business. International Commerce makes up 8% of the revenue base of Alibaba. In the recent quarter , this segment reported 20 percentage point better growth rate than China Commerce segment. At the current growth trends, this segment could contribute over 25% of the revenue base for the company by 2030. Geographic diversification and better growth opportunities from international business are one of the key bullish factors for long-term returns within Alibaba.
Figure 4: Alibaba Cloud reported $2.9 billion revenue in the recent December ending quarter of 2022. Source: Company Filings
Figure 5: Alibaba Cloud reported $1.5 billion revenue in December ending quarter of 2019. Source: Company Filings
Alibaba Cloud reported revenue of $2.9 billion in revenue in the recent quarter with EBITA of $52 million or a 2% margin. Three years back in 2019, Alibaba reported $1.5 billion revenue in December ending quarter with a margin of negative 3%. Hence, the company doubled its cloud revenue in three years with a 5 percentage point improvement in margin. The EBITDA of this business is positive which allows the company to divert more resources to other growth segments.
The China commerce business has suffered from headwinds due to the recent lockdown in China and disruptions to supply chain. With the opening up of the economy, we could see a boost in consumer demand and better growth numbers in this business.
Impact on Alibaba stock
Alibaba produces a massive amount of free cash flow and is also undertaking cost-cutting measures to reduce expenses. This should improve the bottom line of the company in the next few quarters. Margin improvement in key segments like Cloud and Cainiao can also be a major factor in improving net income. In the last decade, Apple had stuck with its buyback programs despite major swings in the stock price. We could see a similar trend in Alibaba as the company tries to reduce its outstanding stock.
Ycharts
Figure 6: Price to FCF ratio and outstanding shares of Alibaba. Source: YCharts
The Price to FCF ratio of Alibaba is quite low. Cost-cutting measures and improvement of margins in key segments should drive the profitability of Alibaba higher. If the company maintains the current pace of buybacks, it would be able to invest over $100 billion in buybacks in this decade. It will reduce the outstanding stock significantly and drive EPS higher. This trend can be a strong tailwind for long-term investors.
Investor Takeaway
Alibaba expunged 1.75% of its outstanding stock in the last quarter alone. It is joining other tech firms in increasing the buyback pace. The fundamentals of the company are also quite strong with multiple growth opportunities in international commerce, cloud, logistics, digital media, and others. The need for massive investments in new businesses is quite low as positive margins are reported in Cloud, Cainiao, and other segments.
Alibaba’s management could invest over $100 billion in share repurchases in this decade which will be a strong tailwind to EPS growth. Improvement in macroeconomic situation in China and international regions should provide further growth momentum to the stock. The buyback program along with strong fundamentals makes Alibaba stock a good buy-and-hold bet.
For further details see:
Alibaba Unleashes Next EPS Growth Driver