Alibaba's (BABA 1.25%) stock recently popped after the Chinese tech giant boosted its buyback authorization from $15 billion to $25 billion, which represents roughly 8% of its current market capitalization.
In a statement, Deputy CFO Toby Xu said the "upsized share buyback underscores our confidence in Alibaba's long-term, sustainable growth potential and value creation," and that its current stock price -- which remains more than 60% below its all-time high -- "does not fairly reflect the company's value given our robust financial health and expansion plans."
Image source: Getty Images.
That confidence suggested that Alibaba's stock, which has been hammered by concerns about slowing growth and regulatory challenges, might be undervalued at nine times forward earnings. Alibaba was also still sitting on $75 billion in cash, cash equivalents, and short-term investments at the end of its latest quarter, and it might be smarter to spend that cash on buybacks instead of acquisitions, since inorganically expanding its ecosystem could attract more attention from antitrust regulators.
However, investors who have followed Alibaba over the past few years should realize its buyback plans aren't as meaningful as they seem. Let's see what investors should expect from Alibaba's new $25 billion buyback plan.
Seven years of buyback plans
Alibaba has launched several multi-billion dollar buyback plans over the past seven years. In Aug. 2015 it launched a two-year buyback plan worth up to $4 billion. In fiscal 2016, which ended in March of that calendar year, Alibaba repurchased $3.1 billion in shares. It didn't repurchase any additional shares from that program in fiscal 2017, but it bought back some of its own shares from SoftBank (SFTB.Y 2.42%) via separate transactions.
In May 2017, Alibaba launched another buyback plan worth up to $6 billion that replaced the previous plan. But it didn't buy back any shares in fiscal 2018, and it only repurchased $1.6 billion in shares in 2019 before the authorization expired. Simply put, Alibaba teased $10 billion in buybacks with two plans, but actually only repurchased $4.7 billion in shares.
Alibaba launched another two-year buyback authorization for $10 billion at the end of calendar 2020. It increased that authorization to $15 billion last August. In fiscal 2021, which ended in March of that calendar year, Alibaba only bought back $371 million in shares.
But in the first three quarters of fiscal 2022, it repurchased $8.8 billion shares -- so it spent about $9.2 billion of the $15 billion authorization before replacing it with this new $25 billion plan. Based on this pattern, investors should only expect Alibaba to spend a fraction of its $25 billion authorization before it gets replaced by another plan.
Its share count has been rising
More importantly, Alibaba's massive buybacks didn't reduce its share count. Over the past seven years, Alibaba's share count actually increased by 8% -- which suggests it likely repurchased its own shares to offset the dilution from its stock-based compensation and its Hong Kong listing in 2019.
Buying back its own shares at nine times forward earnings might be a smart move for Alibaba, especially since it can't invest its cash elsewhere without attracting regulators, but it probably won't make its shares any cheaper.
Don't get distracted by Alibaba's buybacks
Alibaba's buybacks can't mask the fact that its e-commerce growth is decelerating amid macroeconomic, regulatory, and competitive headwinds. They also don't change the fact that its cloud business is losing its momentum as China's internet software companies face tougher data usage restrictions. Investors should focus on those long-term challenges -- and not headline-grabbing buybacks -- to decide if Alibaba is actually an undervalued stock.
