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Alibaba’s $10 Billion Buyback Won’t Solve Its Biggest Problems

#Alibaba (NYSE:BABA) just boosted its current buyback plan, which will last through the end of 2022, from $6 billion to $10 billion. The #Chinese tech giant launched the original buyback plan last #May, and the higher limit seems like an attempt to placate investors as the company faces tougher challenges.

#Those challenges include the slower-than-expected growth of its core commerce business last quarter, the suspended IPO of its fintech affiliate #Ant #Group, and an antitrust probe of its e-commerce business. #Unfortunately, the $10 billion stock buyback won’t solve those issues, for three simple reasons.

#Image source: #Getty #Images.

1. #Alibaba’s previous buybacks were underwhelming

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#This isn’t the first time #Alibaba launched a multibillion-dollar buyback plan. #In 2015 it launched a two-year buyback plan worth up to $4 billion. #In 2017, it launched another two-year buyback plan worth up to $6 billion.

#In fiscal 2016, which ended in #March of that year, #Alibaba repurchased $3.1 billion in shares. #It didn’t repurchase any shares from that program in fiscal 2017, but it bought back some of its shares from #SoftBank in separate transactions.

#Alibaba didn’t buy back any shares via its newly launched $6 billion plan in fiscal 2018. #It repurchased $1.6 billion in shares in 2019, which reduced the remaining authorization to $4.4 billion before it expired.

#In short, #Alibaba teased $10 billion in buybacks over the course of four years, but only bought back $4.7 billion in shares. #As for its current buyback plan, #Alibaba didn’t buy back any shares in fiscal 2020.

#That gap highlights the problem with buyback announcements — the company is setting aside some cash for future buybacks, but it’s not obligated to repurchase any of those shares. Therefore, raising the limit from $6 billion to $10 billion could be completely meaningless.

2. #Alibaba’s buybacks didn’t reduce its share count

#In an ideal situation, a buyback program lets a company repurchase its shares at low valuations, then cancel them to reduce its total number of outstanding shares to boost the value of its remaining shares.

#However, companies also frequently use buybacks to artificially boost their EPS as their net income growth stalls or to offset the dilution from stock-based compensation. #Neither strategy helps investors.

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$10 billion is a headline-grabbing amount, but it would represent less than 2% of #Alibaba’s current market value. #In theory, #Alibaba could slightly reduce its share count with its new buyback plan — but the company’s share count actually rose as it spent billions of dollars on buybacks over the past five years:

BABA Shares Outstanding Chart

#Source: YCharts

Therefore, #Alibaba likely launched its previous buyback programs to offset the dilution from its stock-based compensation, which rose steadily over the past three years, instead of reducing its total number of shares.

3. #Its cash would be better spent elsewhere

#Companies usually start paying dividends and repurchasing shares when they run out of ways to spend their cash. #As a result, dividends and buybacks are often associated with mature companies instead of growing ones.

#Alibaba isn’t a slow-growth company. #Analysts expect its revenue and earnings to rise 48% and 37%, respectively, this year, as its core commerce and cloud businesses continue to expand. #But it still faces tough competition in both markets: (NASDAQ:JD) and #Pinduoduo (NASDAQ:PDD) are resilient challengers in the e-commerce market, while #Huawei and #Tencent (OTC:TCEHY) are tough cloud rivals.

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#To stay ahead of the competition, #Alibaba needs to expand its online and brick-and-mortar stores, enter new markets like video games, and expand its infrastructure. #Alibaba’s recent antitrust challenges, which mainly target its exclusive deals with merchants, could also force it to find new ways to attract merchants and widen its moat against JD and #Pinduoduo.

#Based on those facts, it doesn’t make sense to earmark $10 billion — nearly half of its free cash flow over the past four quarters — for buybacks. #Instead, the announcement seems like a knee-jerk attempt to calm investors amid a barrage of negative news.

The key takeaways

#Buybacks work well for mature, slow-growth companies that generate lots of cash and truly want to reduce their number of outstanding shares. #Alibaba isn’t one of those companies — it’s merely trying to break the streak of negative headlines and appease antsy investors. Therefore, investors should tune out the noise and see if #Alibaba can actually solve its near-term challenges.

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