Alibaba (NYSE: BABA) has just boosted its current buyback plan, which will last until the end of 2022, from $ 6 billion to $ 10 billion. The Chinese technology giant launched the original buyback plan last May, and the upper limit looks like an attempt to appease investors as the company faces tougher challenges.
These challenges include the slower-than-expected growth of its main commerce business in the last quarter, the suspended IPO of its fintech affiliate Ant Group and an antitrust investigation of its e-commerce business. Unfortunately, the $ 10 billion share buyback will not solve these problems, for three simple reasons.
Image source: Getty Images.
1. Alibaba’s previous buybacks have been discouraging
This is not the first time that Alibaba has launched a billion dollar repurchase plan. In 2015, it launched a two-year repurchase plan worth up to $ 4 billion. In 2017, it launched another two-year repurchase plan worth up to $ 6 billion.
In fiscal 2016, which ended in March of that year, Alibaba repurchased $ 3.1 billion in shares. He did not buy back any shares of this program in fiscal year 2017, but did buy back some of his shares from SoftBank in separate transactions.
Alibaba did not repurchase any shares through its $ 6 billion plan recently launched in fiscal 2018. It repurchased $ 1.6 billion in shares in 2019, which reduced the remaining authorization to $ 4.4 billion before it expires.
In short, Alibaba caused $ 10 billion in repurchases over four years, but bought only $ 4.7 billion in shares. As for its current buyback plan, Alibaba did not buy back any shares in fiscal 2020.
This gap highlights the problem with repurchase announcements – the company is setting aside some money for future repurchases, but is not required to repurchase any of these shares. So raising the $ 6 billion limit to $ 10 billion can be completely meaningless.
2. Alibaba’s repurchases did not reduce its share count
Ideally, a repurchase program allows a company to repurchase its shares at low valuations and then cancel them to reduce its total number of outstanding shares to increase the value of its remaining shares.
However, companies also often use repurchases to artificially increase their EPS as their net profit growth stops or to offset the dilution of stock-based compensation. Neither strategy helps investors.
$ 10 billion is a headline figure, but it would represent less than 2% of Alibaba’s current market value. In theory, Alibaba could slightly reduce its share count with its new repurchase plan – but the company’s share count really pink since he has spent billions of dollars on repurchases in the past five years:
Source: YCharts
Therefore, Alibaba probably launched its previous buyback programs to offset the dilution of its share-based compensation, which has steadily increased over the past three years, rather than reducing its total number of shares.
3. Your money would be better spent elsewhere
Companies often start paying dividends and repurchasing shares when they are unable to spend their money. As a result, dividends and repurchases are often associated with mature companies rather than growing ones.
Alibaba is not a slow-growing company. Analysts expect their revenue and profit to increase 48% and 37%, respectively, this year, as their core commerce and cloud businesses continue to expand. But it still faces stiff competition in both markets: JD.com (NASDAQ: JD) and Pinduoduo (NASDAQ: PDD) are resilient challengers in the e-commerce market, while Huawei and Tencent (OTC: TCEHY) are tough rivals in the cloud.
To stay ahead of the competition, Alibaba needs to expand its online and physical stores, enter new markets, such as video games, and expand its infrastructure. Alibaba’s recent antitrust challenges, which mainly target its exclusive deals with traders, may also force it to find new ways to attract traders and widen its gap against JD and Pinduoduo.
Based on these facts, it makes no sense to allocate $ 10 billion – almost half of your free cash flow over the past four quarters – to repurchase. Instead, the announcement looks like an automatic attempt to calm investors amid a barrage of negative news.
The main lessons
Repurchases work well for mature, slow-growing companies that generate a lot of money and really want to reduce the number of shares outstanding. Alibaba is not one of those companies – it is just trying to break the wave of negative headlines and appease restless investors. Therefore, investors should turn off the noise and see if Alibaba can really solve its short-term challenges.