Alibaba's (BABA 2.14%) stock has had a tough time in the last two years as the company faced declining growth and increasing competition. Still, the tech conglomerate has not given up. Alibaba recently announced a variety of steps to enhance shareholder value. Two strategic moves in particular could create significant value for investors. Let's take a look at them.
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The creation of little Babas
Alibaba has exemplified China's massive success in the last two decades. Founded as an e-commerce business, the tech conglomerate has over the years built a business empire spanning cloud computing, logistics, fintech entertainment, and others.
But with its success came its worst enemy: size. Its massive proportions makes it extremely difficult for management to focus on all the different components of the company, primarily since many of these younger businesses operate at different growth stages and with varying nuances.
So to right this problem, Alibaba has decided to break into six business units, giving each one the freedom to pursue its path, including going public separately. This autonomy could lead to better focus, faster market response, better incentives -- and ultimately, a better chance of long-term success.
The company gave more details on the restructuring plan in the recent quarterly announcement. Some of the more important ones were 1) a complete spinoff of its cloud computing business, 2) external financing of its international e-commerce business, 3) exploration of an IPO for its Cainiao logistics business; and 4) execution of an IPO for Freshippo.
While the bulls and bears would debate the pros and cons of the above plan, I feel pretty optimistic about this plan. For one, a complete spinoff of the cloud business means that investors can directly own the top dog of the Chinese cloud industry. They could also sell the stock for cash, treating it purely as a dividend if they wish.
Moreover, as these companies are all going ahead on their own, including capital funding, it will free up enormous cash from Alibaba's e-commerce business. The parent can use this freed-up cash to reinvest into other potentially rewarding ventures or just for share buybacks (more on this later).
Overall, this intelligent move could massively unlock shareholders' value.
Share buybacks to enhance shareholder return
On top of its strategic restructuring, Alibaba has been heavily buying back its stocks lately. In the last 12 months, it spent $10.8 billion buying back around 129.8 million ADS shares -- around 5% of its outstanding shares.
There are many advantages for a company to buy back its stock over time. Firstly, it will boost earnings per share (EPS), which could lead to higher share prices in the long run. Secondly, share buybacks provide a tax-efficient means of distributing excess cash to shareholders.
Moreover, share buybacks can be a prudent use of surplus cash, mainly when investment opportunities are unattractive or the company's stock is cheap (covered below). By repurchasing shares, companies avoid making sub-optimal investments but return excess cash to shareholders.
For its fiscal 2023 (ended March 31), Alibaba generated a free cash flow of 172 billion yuan ($25 billion), which could grow even higher as it goes through the aforementioned corporate restructuring. Putting that excess cash into share buybacks in the coming years could generate massive value for investors.
The stock could be rewarding in the long run
It wasn't easy to be an investor in Alibaba over the last few years as the stock declined more than 70% from its all-time-high price of $317. While it's still early, Alibaba's recent move to streamline its business and buy back its stock in a big way could be rewarding to investors willing to look beyond the near term.
And with the stock trading at a low price-to-sales ratio of 1.7 -- versus an average of 6.1 in the last five years -- holding the stock over the long term could be financially rewarding.
