Alibaba Shakes Things Up

In this podcast, Motley Fool senior analyst Bill Mann and hosts Deidre Woollard and Ricky Mulvey discuss:

• Alibaba's leadership changes.
• The difference between spinoffs and IPOs for Alibaba shareholders.
• If Amazon makes it too hard to unsubscribe from Prime.
• What happens when a stock trades under $1.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 22, 2023.

Deidre Woollard: Alibaba is shaking things up, and Amazon faces more scrutiny. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool Analyst Bill Mann. Bill, how are you today?

Bill Mann: Hey, Deidre. I'm great. How are you?

Deidre Woollard: I'm doing well. This week has been an interesting one for Alibaba. We've got Chairman and CEO Daniel Zhang. He's stepping down to focus on the growth of the Cloud intelligence business as it heads for a spinoff, and Eddie Wu's going to take over as CEO. Is this a case of Zhang putting his energy toward what he sees as the biggest growth opportunity?

Bill Mann: I don't know how you could view this as being anything other than a demotion for for Daniel Zhang. He had formerly, by formerly, I mean three months ago, was to be the chairman of the entire entity, but they are instead putting Joe Tsai back into that role. I suspect that there are political reasons for doing so. We are talking about China. A lot of times, a lot of the sensitivities, particularly with a business as large as Alibaba and as meaningful as Alibaba is to the economy of China, have to do with relations between the companies and the government. There's a lot that we don't know here, but in a lot of ways, the person who is in this role right now is trying to steady a ship at Alibaba. They have had a very rough go of things. A lot of their divisions are either loss-making or their most important division, which is Taobao, has seen earnings declined. I want to say negative earnings growth, but that's much easier put as an earnings decline. There's a lot to right here. I think, for Zhang, you really can't view this as being anything other than a demotion. He's focusing on cloud, which is a struggling part of their business, and I think that his future at the company is going to be very tightly linked with that.

Deidre Woollard: Interesting because the memo that he released definitely spun it the other way, so they did some good PR there.

Bill Mann: You bought it, I guess.

Deidre Woollard: Maybe I was the only one.

Bill Mann: No. I think that that's probably true, and obviously, it's still a very high-profile, very important position. What are they going to say otherwise though? Essentially, you have a company that's preparing to break itself up. They made a decision three months ago, and now they are reconsidering that structure, and they are putting power into the hands of one of two permanent members, I should say, of the Alibaba Partnership, which is the long-standing kitchen table group. I think there are 29 members now, but the only permanent ones are Jack Ma and Joseph Tsai, so they're putting more official responsibility upon him as well.

Deidre Woollard: Let's talk about that because, Jack Ma, he's being a visiting professor in Tokyo recently. Then this week he's been photographed with Joseph Tsai. How should we consider Jack Ma as part of the story?

Bill Mann: It's hard to say because he essentially disappeared, and by essentially disappeared, he actually physically disappeared for a long time after some comments that he made about the banking system in China that were taken as being impolitic, which is a cardinal sin in China. He has been in the background for long time. He still owns 2.5% of the company roughly. He is a member of the Partnership, which is a pretty unique group where there are standing members, and again, it's just those two and then other temporary members. Within the Partnership, it is one member, one vote, so he still has a fair amount of influence at Alibaba. I think moving Joseph Tsai, who is Taiwanese-born, educated here in the US, into a much higher role as his role as a co-founder speaks a lot to how important Alibaba views this upcoming year and their impending breakup will be.

Deidre Woollard: Let's talk a little bit about that breakup. I guess there's restructuring into six different divisions, some of them it seems like were headed for spin-offs more quickly, including the logistics division. You had a line recently that I loved in another according. You called Alibaba the circulatory story system of the Chinese economy, so I'm wondering, which part of the circulatory system do you see is spinning off first, and which ones are more appealing to you?

Bill Mann: It's really hard to say. They have not been specific about what's getting spun off or what their process is going to be, and I think that this restructure in the C-level and the C-level plus has a lot to do with them considering what their ongoing process and strategy is going to be. We don't even really know whether companies are going to be spun-off or whether they're going to be IPO'd, and that matters for investors. Are you going to receive shares in a component of the current Alibaba, or is simply the company going to do an IPO in which the company would receive proceeds? For the most part, if you look at the six divisions, there are really two choices that you have. You either have companies or divisions that are making a lot of money but aren't growing very quickly, and that's primarily Taobao and Tmall, and the remainder are growing faster, but are, at the present, unprofitable, and that includes Cloud. Then the final, the sixth division, is media and entertainment. That has been a terminally underperforming component of Alibaba, and I suspect that that is something that may end up being sold. But of the ones that are of most interest to me, I think that I've got to go with Taobao and Tmall and then, following that, their logistics services because those are two entities at Alibaba that are really hard to recreate.

Deidre Woollard: Let's talk about Tmall because they're launching Tmall in Europe. We don't have too many details on that yet. I guess there a test in Spain going on. All that I've seen so far is that it's the idea is to bring local products to local consumers. That sounds good. But what about Tmall could give it an advantage in Europe?

Bill Mann: I don't know that there's going to be much of an advantage over the existing players with the exception of this. It is that they have a massive checkbook behind them. They have the capacity to launch at a scale that is almost unheard of or unmatched by existing competitors in the space. I think that the move into other geographies outside of Greater China and East Asia has to do a little bit more with the slowing of the growth in its home region than it is a competitive advantage that they can bring to bear. So they're very much going to be a credible and powerful competitor here. But it is, in fact, a highly competitive environment to start with. But it's one where they think that they have some capacity to compete.

Deidre Woollard: Let's move on and talk a little bit about another e-commerce and Cloud company, Amazon. Federal Trade Commission has taken action against the company for what it calls non-consensual subscriptions and cancellation trickery.

Bill Mann: It sounds dirty when you put it that way.

Deidre Woollard: This is over Prime. How much should we be taking the FTC seriously? They've gone after Amazon before. Recently Amazon has paid about 30 million for a child data concerns over Alexa, privacy concerns over Ring. What's the story here?

Bill Mann: I think you should take them incredibly seriously. In fact, three months ago, the FTC filed a proposed rule provision which would make it easier for consumers to click to cancel. Basically the principle there is, however hard it is for you to subscribe to something, it should be that easy or easier to cancel. This is a broader rule-making that came out, and they're getting comments on now. That was the end of March. But for them to sue Amazon, specifically, tells you that that original rule-making, who that was primarily targeted at. The suit itself makes for fascinating reading in some ways, to the extent that lawsuits ever make for fascinating reading, because there was a actual process in place called the Iliad Flow is what they called it within Amazon. It's a reference to the Iliad and the Odyssey, the Odyssey being the journey, and then the Iliad being the war, how hard it is for people to cancel. I think this is something that was coming anyway. This is a much more spectacular event in that they are actually going after Amazon. Whenever I see things like this, Deidre, I don't know if you are in the same boat. Whenever I see a company that makes it really hard to cancel a service, I view that as a sign of weakness for the company itself. If the level of faith that you have in your business or your product is that it should be hard for people to get away from you, I think that's a statement for the company itself and for the product itself. The suit has just come out. I suspect that the suit itself is a way of pushing along the more omnibus click-to-cancel rule-making that the Federal Trade Commission wants to make.

Deidre Woollard: I think it's interesting because we've seen a switch with subscriptions from boxes to more like entertainment and things like that. Do you feel like the subscription economy is changing as consumers start to maybe look at how much they're spending?

Bill Mann: I would say so. There's obviously a point of resistance. It was Jim Barksdale who once said, in terms of entertainment, that there are two ways to make money. One is to bundle, and the other is to unbundle. I think that we have come to an incredibly unbundled situation with consumption habits, I'm going to speak domestically, of a lot of Americans. I have two kids in college, and their textbooks are on a subscription basis, not on a buy a big piece of a former tree. I think, at some point, there's got to be some pushback. It may just come in the form of rebundling a lot of things that have been unbundled.

Deidre Woollard: This FTC thing, it came out at the same time that Amazon was announcing Prime Day, a lot of hype around Prime Day every year. It starts July 11th this year, seen as a bellwether. How are you thinking about e-commerce right now? Is there more pressure on Prime Day this year than, maybe, in past years?

Bill Mann: I don't know. I always view Prime Day is a way that Amazon could clear out its warehouses of stuff that hasn't been selling, which is I guess a pretty powerful thing for a company to be able to do. Obviously, Prime Day in 2021 and 2022 were massive, I think, particularly, at the tail end of the pandemic and us being shut into our houses, that was probably meaningful. I'm not sure. This is an entirely manufactured event, 100%

Deidre Woollard: Absolutely. 

Bill Mann: Hallmark wishes they had thought of doing something as powerful as Prime Day and turning it into a holiday. I wish I'd paid more attention to it other than to just be cynical about it. What is this, a random day in July when we could buy stuff, and so more Amazon boxes will show up at our houses? Yes, I assume it's important for them. I also wonder how in the world it got to be so important as it is other than a day to go and get some bargains.

Deidre Woollard: The media coverage of it gets breathless, which I find interesting. The things that are changing this year though, one of them is that it's going to allow Buy with Prime deals. I'm wondering if that's going to make a difference because it'll be not just Amazon, but third parties as well. So that might be something to watch, too.

Bill Mann: It really might be something to watch as well. Vaya con Dios, go and buy your stuff. Over the last couple of years whenever it has come up, it's been the kind of thing when I've rolled my eyes pretty hard, another great reason for us to buy some stuff.

Deidre Woollard: Which is what both Amazon and Alibaba seem to want from us.

Bill Mann: Sure. That might make them happy, but I don't. [laughs] But beyond that, for me, I'm not sure what the point of it is.

Deidre Woollard: Thanks for the chat today, Bill.

Bill Mann: Thank you. 

Deidre Woollard: Many of the SPACs that hit the market in 2021 are now trading for under a dollar. What happens when a company faces delisting risk? I talked to Ricky Mulvey about what's next for some of these companies.

Ricky Mulvey: Just because you got to place on a stock exchange doesn't mean you get to stay there. Deidre, some higher-profile companies have received these delisting notices, like Blue Apron, WeWork, and BuzzFeed. But let's go back a little bit. Where do you think the story starts?

Deidre Woollard: The story starts with the SPAC boom. We had all of these companies come to market without going through this more rigorous IPO cycle. We had over 600 SPACs go public in 2021, not as many since then, obviously. But some of these companies were just not ready for prime time, I think, and the market has reflected that. There was a report from a SPAC research in April that there were over 100 SPACs in the pennies-per-share club. As these companies trade under a dollar, they can't continue to do that. There are rules for both in the New York Stock Exchange and the Nasdaq about that.

Ricky Mulvey: I think that $1 per share is interesting because the barrier makes sense because once you start getting in that $1 range, little swings in share price have have just a massive impact on the folks who own the stocks.

Deidre Woollard: Absolutely.

Ricky Mulvey: You, personally, Deidre, you are a SPAC, and you just got to a delisting notice. What's the warning ticket you're getting from the Nasdaq or the New York Stock Exchange?

Deidre Woollard: You're getting this warning. It happens if you've been under $1 for about 30 days. That opens, for the Nasdaq, what they call a compliance period. You've got 180 days, basically, to right the ship one way or another, and then you could be eligible for a second 180-day period if all requirements are met. But really, once you're under $1 for 30 days, it starts this clock that then just keeps ticking, and you either have to take action or risk being delisted permanently.

Ricky Mulvey: The company gets the delisting notice. They have some tricks up their sleeves to get back on the good side of the market officials. What can they do after receiving that notice?

Deidre Woollard: A company can't really wait for a market to fall in love with it and just give it more money, so here's a couple of tricks. First one is a reverse stock split, which is just basically what it sounds like. It's that you get more shares and so that will boost up the price. The other thing is companies are really trying to raise capital. Let's talk about Blue Apron. They just use both. They did a 1-for-12 split. They also sold off part of their infrastructure to a company called FreshRealm for 25 million in upfront cash, another 25 million if they hit certain incentives, and then they're going to sublease some of that space that they sold back from FreshRealm. They're trying to do both at the same time, and when you look at these companies, especially ones that don't have a lot of money right now, and they're in this under $1 category, they're basically trying to do both of these things at once. First, correct the problem and then also make sure they have enough capital to keep going.

Ricky Mulvey: What a darling that's fallen back to Earth, in the case of Blue Apron. I think, at one point, it was worth about $6 billion. Now in some of its quarterly releases, it's using the term "in order to fund near-term operations," which is always a red flag, Deidre. Let's say a company fails at that. They're under $1 for more than a 30-day period. They can't get back on track. What happens to the company and the stock holders after a company is delisted from those exchanges?

Deidre Woollard: It is not good. They can trade over the counter. They, can potentially come back, but the amount of companies that come back is pretty low. A lot of times what you see is a Chapter 11 and a restructuring. Maybe they get bought by somebody. Once a company gets to that point where they're officially delisted, that is a real demarcation point. The market has lost faith. It's usually likely that the debt is out of control. But usually maybe the best-case scenario would be a buyout in that case.

Ricky Mulvey: What's important to look for if you're worried a company you own might be in danger of getting delisted?

Deidre Woollard: I would want to make sure that the company has a plan, and I would want to look and make sure that they have enough capital to keep going. You really want to see, do they have enough runway? How much debt do they have? When is that debt coming due? How much cash do they have? Also longer, what is the growth story and is it realistic? Are they waiting for the economy to shift or something like that? Or if they waiting for some other milestone to be achieved? You want to make sure that there's a plan, first of all, and that the financial back up the plan.

Ricky Mulvey: One company with a, let's say, complicated growth story ahead of it that, maybe, is shuffle stepping out of a delisting is WeWork, which has the most office space of any company in the United States. What are they doing to shuffle step out of these delisting notices?

Deidre Woollard: This one is interesting. WeWork, as we all know, is the most famous, I think, S1 that completely derailed their IPO. Then they came to market via SPAC. They restructured their debt in May, so they pushed about 1.6 billion in debt maturities. They pushed that out to 2027. This one is interesting. They're doing a vote, a reverse stock split, but they've given us a range from 1-10 to as high as 1-40. That does give us a lot of range. As a shareholder, you don't get to vote on that. You get to vote for or against the split. The board gets to decide how big the split. It's in an interesting spot. The CEO and the CFO recently left as well.

Ricky Mulvey: Let's say if not more people are going to the office, that seems to be a macro win that's hurting WeWork. Is there anything that could turn them around, do you think?

Deidre Woollard: One of the things that I've thought a lot about what this is, is it the right idea? It seemed like such a brilliant idea, and yet WeWork is not the only one that has had a problem with making coworking profitable. After the early success of WeWork, a couple of the big real estate companies, including CBRE, they started their own WeWork thing. CBRE had one called Hana. They transferred that to Industrious, which is another coworking company. It's interesting. I feel like there's a good brand here, but I think the split is buying them time. I'm wondering how big it could be, and I think that the idea was bigger than the actual reality is. One of the things I'm looking at is IWS Regus, that's the OG in the space. They've struggled on and off. They currently have around a 3300 spaces. I think that part of the problem with WeWork was that they projected a demand that was really much bigger than it actually turned out to be.

Ricky Mulvey: I was actually looking at the IWG earlier today, the one that owns Regus. Actually, surprisingly, their revenue has gone up post-pandemic. That surprised me. They seem to be having a huge problem with net income profitability. I think a lot of that is because of debt restructuring, and they're paying much higher interest rates on those loans.

Deidre Woollard: Absolutely. It is not a great time to be dealing with trying to get a loans for office space.

Ricky Mulvey: WeWork has a supply problem. There might be a demand problem for some of the vacation rentals, SPAC darlings, including Vacasa and Sonder.

Deidre Woollard: Vacasa has been an interesting one to watch. It's essentially property management service for vacation rentals. That makes a lot of sense. We've seen how big Airbnb has gotten. Vacasa basically handles property management for homeowners. It should be a great thing, but it has floundered a bit. The shareholders did recently approve a reverse stock split. The delisting problem is solved for now, but they've got some big problems including homeowner churn. There's the demand, but I think that there's an issue of trying to right-size here because you've got a new CEO in place, Rob Greyber. They've done two rounds of layoffs. They're trying to streamline their tech. But I think part of the problem is really having the right supply of cleaning staff based on the turnover, so you got two levels of supply and demand going on there.

Ricky Mulvey: Also never good to see a CFO transition when your company is in turmoil like that. One of the most high-profile delisting cases going on right now is Nikola, the electric truck maker, which is actually producing electric trucks. There's a lot of controversy and battle going around with the stock split in Nikola, because the company right now is trying to issue more shares in order to fund existing operations. It seems to be bleeding a lot of cash right now, where I think their net income for the previous 12 months was about negative $800 million. They have about 400 million in cash, and you have a founder who is awaiting sentencing for securities fraud, and Trevor Milton who is saying, you absolutely should not dilute any of the shareholders to this company.

Deidre Woollard: This one is so complicated. They've been doing some of the delisting playbooks, so they've done layoffs, about 20% of the staff. They sold off a joint venture to one of their partners in Germany. They've taken their operations. They're consolidating it all in Coolidge, Arizona. They say that they can save 400 million by 2024. That's good, but they're trying to straddle both the electric side and the hydrogen side, which I think is really complicated. The Trevor Milton thing adds just this extra level of noise on top of everything else that they're trying to do.

Ricky Mulvey: Not just noise. I think he still has 50 million shares in the company, so he has a significant vote. You have this poor CEO, who has a video out on Vimeo, appealing to the shareholders on Robinhood, please, in order to keep this company going, we need you to let us issue more shares and dilute you for a little bit. We couldn't even find how many new shares they wanted to issue. But this is, a company like many of the ones we just described that is just struggling for oxygen right now in addition to those delisting problems.

Deidre Woollard: The delisting thing is important because, once you get delisted, it is a black market. It is very hard to come back from that. He has to convince people. Trevor Milton is out there saying, don't do this. This is a terrible thing for you to do as a shareholder, so that's complicated as well. Even if he throws in all of his votes, he can't fully do it himself, so he needs to convince them, so you've got both of these sides going on at the same time. 

Ricky Mulvey: Interesting to see how all of these play out. Deidre Woollard, I appreciate it. 

Deidre Woollard: Thank you. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.