Once a Wall Street darling, Alibaba (BABA 0.59%) has been a problem child for most investors over the last three years. A series of setbacks, including the calling off of Ant Group's IPO and muted growth, has set Alibaba's stock for a spiraling decline, down more than 70% from its peak of $317 per share.
To address the current situation, Alibaba is undergoing a massive corporate restructuring by breaking itself into six separate units. But there is plenty more that the company can -- and needs to -- do to turn around the ship. In this article, we will explore two crucial areas that Alibaba needs to address to regain investors' support.
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Alibaba needs to turn around its China e-commerce business
Founded as an e-commerce business, Alibaba has expanded vertically and horizontally over the years to cover multiple industries, including logistics, fintech, entertainment, cloud computing, and many more.
While many investors like Alibaba's diverse business structure, we should not forget that e-commerce is still the most dominant business within the group by far (and will remain so for the foreseeable future). For the fiscal year ending March 31, 2023, its Chinese e-commerce business accounted for 67% of Alibaba's revenue. What's more, this segment accounted for all the profits that Alibaba had that year -- the other parts were unprofitable.
So, like it or not, Alibaba is still predominantly a Chinese e-commerce company. And herein lies the problem. The crown jewel business (led by Tmall and Taobao) has seen a 1% decline in revenue in the last fiscal year. While this business faced challenges from the repeated lockdowns in China, the up-and-coming Pinduoduo and Douying have also put enormous pressure on the incumbent. Alibaba must recoup itself and turn its ship before the situation worsens further.
To do so, Alibaba is streamlining its business structure by breaking its empire into six units, so that each business segment has its own management team to run the business more effectively. The aim is better responsiveness to market changes, faster (and hopefully better) decision-making, and a better incentive plan. Ultimately, the goal is to return to the entrepreneurial spirit that Alibaba badly needs to get back into shape.
It's still early days, and investors will need to give the company at least a few quarters to judge the effectiveness of the new teams. The e-commerce business needs to demonstrate that it can get back into growth mode in the next few quarters and, ideally, grow at a rate that meets (if not exceeds) the industry growth rate.
Alibaba needs to allocate its surplus capital effectively
While running its operation well has been the priority for Alibaba, capital allocation is another crucial area for the company to focus on because it directly affects its ability to grow, generate profits, and create value for shareholders.
Historically, Alibaba's capital allocation was mainly focused on redirecting the profits from its cash cow e-commerce business into other fast-growing but unprofitable young ventures, such as cloud computing and logistics. But as the conglomerate sets its subsidiaries free -- giving each unit the freedom to pursue its funding needs -- the burden on the e-commerce business will lighten significantly.
With its extra cash flow now available for redeployment, Alibaba can focus on improving its e-commerce business and enhancing shareholders' value. For instance, it can selectively allocate capital into areas like marketing, or invest in research and development to improve the competitiveness of its e-commerce business.
Besides, Alibaba can sustain (or even increase) its current share buyback activities, given that its stock is trading close to a historically low valuation. The tech company can also consider a dividend policy to return some surplus cash to shareholders. And while the company can also invest in new business areas, it should be very selective in these ventures.
In short, Alibaba could generate enormous shareholder value if it handles its capital allocation well. It is an area that investors should monitor closely.
So what does it mean for investors?
Alibaba was once the bedrock of China's technology companies. Yet, a series of missteps -- such as rubbing shoulders with the Chinese authorities -- and external challenges have caused investors to lose confidence in it.
But it's not the end of the world. It still has some of the best business franchises in China. It just needs to focus on running these businesses better to deliver sustainable value to all stakeholders. It is already moving in that direction with the recent corporate restructuring, and investors will need to be patient with the turnaround work.
If Alibaba can get its struggling operations back in shape and improve its capital allocation from here on, there's no reason it couldn't return to its glorious old days.
As a shareholder, I'm looking forward to that day.
