Alibaba (BABA) is one of the most acquisitive big tech companies in the world. On top of that, no other tech giant invests in other companies all around the world like Alibaba.
Therefore, one could say that Alibaba seeks value, acquiring China’s equivalent to Netflix (NFLX) — Youku Tudou (YOKU) — for a stock price that’s 60% lower than its five-year high, and also bought a near 10% stake in Zulily after it lost about 70% of its value post-IPO.
Therefore, given Alibaba’s eye for value, one must wonder what management sees in its own stock, and what moves it might make.
BABA’s Best Investment Opportunity
In a recent article I explained that BABA stock trades at half the valuation multiple of Amazon.com (AMZN) but is growing twice as fast. Given the outlook for Chinese e-commerce and the global industries that BABA has invested in, it would certainly appear that BABA stock is a tremendous value investing opportunity.
Furthermore, one must figure that Alibaba executives realize the value in the BABA stock price, and want to shift their focus towards making a great investment in BABA. With $16.6 billion in cash and equivalents and $8.1 billion in trailing 12-month free cash flow, BABA is cash rich, and could really take advantage of a stock price that is still more than 30% off its post-IPO high.
For BABA, a special dividend would be worthless. Sure, it may boost sentiment, but there is also a risk that it would do nothing, and that the boost would only be temporary. At that point, Alibaba would have wasted the money.
Instead, it would make much more sense for Alibaba to launch a new buyback program, an enormous buyback program of $30 billion that would surely drive the BABA stock price much higher.
Why a $30 Billion Buyback Is Best for BABA Stock
If BABA were to launch a $30 billion share repurchase plan, it could effectively buy back nearly 15% of its shares outstanding at its current price. In other words, it would reduce BABA’s share count from 2.5 billion to 2.12 billion. With 2.12 billion shares outstanding, BABA stock would have to trade at $94 per share to sport the same $200 billion market capitalization that it has at $80 with the current number of shares. That creates substantial upside in the stock price.
So, beyond the obvious reasons of stock gains and BABA being a value investment as incentives for a large buyback program, there are legitimate reasons to think that management might just do this.
For one, Alibaba launched a measly $4 billion share repurchase plan in August 2015 that was supposed to be spent over a two-year period. Instead, BABA spent $2.74 billion in a two-month period! If BABA were to maintain that pace of buybacks, it would spend more than $30 billion over the next two years.
With that said, Alibaba management are value investors by trade, and my guess is that management identifies all that value in its own stock price. While it may not be a $30 billion share repurchase plan, expect Alibaba to announce a program that is both significant and far larger than its current plan.
When it does, BABA stock will have the catalyst it so desperately needs to boost its stock long-term.
As of this writing, Brian Nichols was long BABA stock.
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