Alibaba (NYSE: BABA) has only increased its current repurchase plan, which will last until the end of 2022, from $ 6 billion to $ 10 billion. The Chinese technology giant unveiled the original buyback plan last May, and the higher limit looks like an attempt to calm investors as the company faces more difficult challenges.
These challenges include the slower-than-expected growth of its core operating traffic last quarter, the suspended IPO of its fintech subsidiary Ant Group, and an antitrust investigation of its e-commerce business. Unfortunately, the $ 10 billion repurchase will not solve the problems for three simple reasons.
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1. Alibaba’s previous buybacks have been overwhelming
This is not the first time Alibaba has launched a million-dollar repurchase plan. In 2015, a two-year repurchase plan worth up to $ 4 billion was launched. In 2017, it launched another two-year repurchase plan worth $ 6 billion.
In fiscal 2016, which ended in March of that year, Alibaba repurchased $ 3.1 billion worth of shares. It did not repurchase any shares of the program in fiscal 2017, but repurchased some of its shares Soft bank in separate transactions.
Alibaba did not repurchase any shares in fiscal 2018 via its newly launched $ 6 billion plan. It repurchased $ 1.6 billion worth of shares in 2019, reducing the remaining authorization to $ 4.4 billion before it expires.
In short, Alibaba teased $ 10 billion in repurchases over the course of four years, but repurchased only $ 4.7 billion in shares. As for its current buyback plan, Alibaba did not repurchase any shares in fiscal 2020.
The gap highlights the problem with repurchase announcements – the company is putting cash away for future repurchases, but it is not obliged to buy back any of these shares. Therefore, it may be completely pointless to increase the limit from $ 6 billion to $ 10 billion.
2. Alibaba’s repurchases did not reduce its share
In an ideal situation, a repurchase program causes a company to repurchase its shares at low valuations and then cancel to reduce the total number of outstanding shares to increase the value of its remaining shares.
However, companies also regularly use buybacks to artificially increase their EPS as their net income growth declines or to compensate for the dilution of share-based compensation. No strategy helps investors.
$ 10 billion is a significant amount, but it will represent less than 2% of Alibaba’s current market value. In theory, Alibaba could slightly reduce its stake with its new buyback plan, but the company’s stake counts actually rose as it has spent billions of dollars on repurchases over the past five years:
Source: YCharts
Therefore, Alibaba has probably launched its previous buyback programs to compensate for the dilution of its share-based compensation, which has risen steadily over the past three years, instead of reducing its total number of shares.
3. Its cash could be better spent elsewhere
Companies usually start paying dividends and buying back shares when they can no longer spend money. As a result, dividends and buybacks are often associated with mature companies rather than growing businesses.
Alibaba is not a slow growing company. Analysts expect its revenue and earnings to rise by 48% and 37% respectively this year, as its core operating and cloud businesses continue to expand. But in both markets there is still fierce competition: JD.com (NASDAQ: JD) and Pinduoduo (NASDAQ: PDD) are resilient challengers in the e-commerce market, while Huawei and Tencent (OTC: TCEHY) is tough cloud competitors.
To keep up with the competition, Alibaba needs to expand its online and brick-and-mortar 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, could also force it to find new ways to lure traders and increase its grit against JD and Pinduoduo.
Based on these facts, it does not make sense to spend $ 10 billion – almost half of its free cash flow over the past four quarters – on repurchases. Instead, the announcement looks like an attempt to calm investors amid a deluge of negative news.
The most important takeaways
Repurchase works well for mature, slow growing companies that generate a lot of cash and truly want to reduce their number of outstanding shares. Alibaba is not one of the companies; he is simply trying to break the line of negative headlines and appease bad investors. Therefore, investors need to stop the noise and see if Alibaba can solve its challenges in the short term.