The overseas perception of its brand is tainted because it is beholden to China’s government and must do whatever it takes to please them including violating personal privacy. Thus, it has been reduced to making overseas investments instead of real acquisitions
Bludgeoned IPO investors in Alibaba are hoping for someone to rescue them.
Last week a rescue arrived in the form of a share buyback. While public companies are estimated to spend about $400 billion in buybacks this year, Alibaba is trapped in an especially unusual situation where it feels the need to stage a buyback within a year of listing. It suggests more insidious problems than an underappreciated stock price.
A look at its year of activities shows that Alibaba might be a good company in China, but a bad stock. With a market cap of US$176 billion, it behaves more like an over promoted penny stock.
Jack Ma has said he doesn’t pay much attention to his company’s share price because he is focused on “making it easier to do business around the world.” A year later, it appears he does care about Alibaba’s share price – enough to spend his own money to participate in a buyback and cannot expand his business outside of China.
Despite the announcement of a buyback last week, Alibaba closed Friday at an all time low of $68.18 and threatens to fall through its IPO price of $68. The group missed earnings consensus in each of the last four quarters.
A falling share price and growing shareholder disinterest is the punishment for an e-commerce growth company that fails to deliver on its dream. But, greater challenges plague the relationship between Alibaba and the market.
A buyback will run head into about 1.6 billion shares coming out of lockup in September, after the first anniversary of the IPO. The end of lockups is usually followed by stock price declines just like Alibaba’s stock decline during its March lock up expiration.
Yahoo and Softbank are two big shareholders who are unlikely to dump stock as they seek to maintain stability. However, most of the other Chinese shareholders are likely to exit heavily as they do in other China listings, which is scaring away investors.
Ironically, Alibaba should extend the share buyback into a privatization because its style of business is much better suited for a private rather than a public company. It never really needed public money as its cash flow and profits are healthy enough to develop business and leverage loans. And a private company suits its need for secretive decision making.
The most likely reason for it to list is to create a public exit for all of its two large shareholders and insiders who were acrimonious after Jack Ma’s alleged misappropriation of Alibaba’s interest in Alipay.
Big hedge funds also have turned bearish on Alibaba. Tiger Global Management, Viking Global Investors sold large chunks of shares. And George Soros’ fund offloaded almost its entire stake according to regulatory filings. Alibaba needs to find longer term shareholders beyond day traders to avoid becoming volatile trading ammunition for hedge funds.
The recent failure of Alibaba’s American unit, 11main.com, showed everyone that American consumers are apathetic towards Alibaba and don’t buy into Jack Ma’s showmanship. It also demonstrates that Alibaba can’t grow a US business and Ma doesn’t have enough credibility to make a major e-commerce acquisition such as eBay.
The lack of any meaningful US presence revives billionaire Mark Cuban’s opinion that the SEC should not have allowed Alibaba to list on the New York Stock Exchange, because it cannot be held accountable for potential insider trading violations.
Alibaba may never succeed internationally. The reality is that there is simply no market for Alibaba and other Chinese internet companies outside of China especially since most of them are copies of existing and entrenched American companies.
Moreover, Alibaba can’t shake the understanding that owes its success to Chinese government protection.
The overseas perception of its brand is tainted because it is beholden to China’s government and must do whatever it takes to please them including violating personal privacy. Thus, it has been reduced to making overseas investments instead of real acquisitions.
The recent hiring of former Goldman Sachs banker Michael Evans as president to head up international growth strategy is counterproductive. He is especially unqualified for this position as he has no background in technology or e-commerce. Most technologists like Marc Andreessen openly deride bankers who join the technology business as adding little value.
Alibaba needs to groom its culture to eventually make and integrate substantial international acquisitions rather than engage in a deal making frenzy.
So like a penny stock promoter, Jack Ma is famous for his hype, but now his hype has been shown to be both naïve and arrogant.
This post originally appeared in the South China Morning Post.
Photo: Jack Ma