I discuss Alibaba splitting into six companies, BABA share buybacks, and why hasn’t Charlie Munger (Daily Journal) sold Alibaba if it’s such a big mistake?
After months of being a persona non grata, Jack Ma made a public appearance on mainland China recently. Apparently, Jack Ma is one of the key orchestrators behind Alibaba’s announcement to split itself into 6 business units or independent companies. So much for being a company that lasts for 102 years, as Jack Ma had once intended for the “Alibaba economy.”
On news of the split in March 2023, BABA’s stock price jumped from the $80 something per share range to over $100 per share. Maybe the new Alibaba companies will be able to get back onto a sustainable growth path after the company and its stock have been languishing over the last few years. Around $600 billion in market cap had evaporated since Jack Ma’s infamous speech in October 2020.
People fall on both sides of the BABA debate as to whether or not Alibaba splitting is a good or bad thing. Some believe the company split is a ploy to pump up the ailing stock price, while some believe it’ll open capital markets and make for improved regional performance depending on the business. Alibaba’s CFO Toby Xu said the split would increase the independent companies’ market competitiveness.
I think the crown jewel is the cloud business because it likely has high margins (much like Amazon’s AWS) compared to the low margin ecommerce side of the house. Alibaba Cloud has become profitable in recent quarters.
It should not be surprising, therefore, that the current overall Alibaba CEO Daniel Zhang would be the next CEO of the split off Alibaba Cloud business. The CEOs of the other business units are:
Cloud Intelligence Group: Daniel Zhang continuing as CEO
Taobao Tmall Commerce Group: Trudy Dai to be CEO
Local Services Group (food delivery service Ele.me): Yu Yongfu to be CEO
Cainiao Smart Logistics (logistics services): Wan Lin continuing as CEO
Global Digital Commerce Group (international e-commerce AliExpress and Lazada): Jiang Fan to be CEO
Digital Media and Entertainment Group (streaming/movie business): Fan Luyuan to be CEO
Each of the new companies will have their own board of directors that the new CEOs will report into. Only Tabobao Tmall will continue to be wholly owned by Alibaba, which will become a holding company. The other companies may eventually pursue their own IPOs when they are ready.
Even with this large reorganization, the listing status of BABA and HK 9988 will remain unaffected (for now). If we’re interested in owning BABA (or HK 9988), we’ll just have to research these business groups individually to see if we’d want to be invested in these kinds of businesses with their own underlying economics. There may be both winners and losers in this group, and I’d beware of any of the ones that get saddled with a lot of long term debt after the split is made.
I discuss Alibaba’s recent financial performance and share repurchase trends, where there’s $18.7B out of $40B remaining to do more buybacks til 2025. While overall revenues have barely increased year over year in the quarter ending December 2022, there is reason to believe that business fundamentals will improve with the Chinese economy opening up and the regulatory upheaval calming down.
In spite of Charlie Munger, Daily Journal’s former chairman, saying that Alibaba was one of his worst mistakes, DJCO has not yet sold its current stake in BABA as of Q1 2023. Will Charlie Munger and DJCO sell soon or continue to HODL BABA until they can breakeven on it?
Charlie said during February’s Daily Journal meeting: “I regard Alibaba as one of the worst mistakes I ever made. In thinking about Alibaba, I got charmed with the idea of their position on the Chinese Internet. I didn’t stop to realize they’re still a G retailer. It’s going to be a competitive business, the Internet. It’s not going to be a cakewalk for everybody.
Well, the idea that I destroyed that it wasn’t a good idea. It was a bad idea. When the Internet came in, I got overcharmed by the people who are leading in the online retailing. And I didn’t realize it’s still retailing. It may be online retailing, but it’s also still retailing. And I got a little out of focus and that let me overestimate the future returns from Alibaba. And so I have never [made the same mistake twice.]”
And even if Charlie has soured on BABA, others like Michael Burry, Bill Miller, and Guy Spier continue to own BABA for now.
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