Alibaba – Jack’s back

Eddie and Jack can only do so much.

• After a string of failed strategies to ignite interest in the company and its stock, Jack Ma is making a very behind-the-scenes return to Alibaba in the hope that he can bring the company back to life and break the overwhelmingly negative sentiment on his creation.
• However, the recovery remains hostage to the economy and here Eddie Wu and Jack Ma can do very little.
• Eddie Wu is taking over as CEO of Alibaba on September 10^th 2023 in a move that will allow Jack Ma to once again have great influence over strategy and operations while maintaining a very low profile.
• Following his fall from grace in 2020, I think that Jack Ma can never return in an official capacity as the Chinese State will be very keen to ensure that the delusions of grandeur that led to his downfall do not return in any way.
• Eddie Wu is one of the original founders of Alibaba and is known as a close associate of Jack Ma’s and as such, I suspect that Mr Ma will be deeply involved in the strategy and execution to effect a turnaround.
• Two things need to happen:
  • First, Split up: Alibaba is being split into 6 companies one of which is the original e-commerce piece and the others being the Alicloud cloud business, Cainiao Logistics, and so on.
  • The idea here is that the sum of the parts should be worth a lot more than the original once price discovery (such as IPO) is applied to the other 5 units.
  • I have some doubts with regard to this as not all of these spinoffs make sense and so I suspect that there is a regulatory angle to this as well.
  • For example, Cainiao Logistics is an essential part of Alibaba, and one only has to look at how much Amazon invests in its ability to deliver packages for evidence of this.
  • Hence, I am not convinced that spinning out this crucial division is a good idea for Alibaba and so I think that there are other factors at play.
  • As 6 independent companies, each company will be subject to potentially selling the state golden shares and/or having representatives from the CCP sitting on their boards.
  • Instead of having visibility on just one company, the state will now be able to see each of the six divisions individually and be able to influence their activities independently.
  • This will also reduce the perceived monopolistic power of Alibaba and any further potential that it or its executives might have to challenge the authority and good standing of the state and its entities.
  • Alibaba is certainly undervalued but I am far from convinced that being a large unwieldy conglomerate is the reason for that discount.
  • Second, Mojo: Alibaba has lost its mojo both as a result of becoming so big and also as a result of being hammered by the technology regulatory crack-down that Jack Ma triggered.
  • Eddie Wu and Jack Ma’s other task will be to restore life to Alibaba and thereby convince investors that Alibaba can return to growth and that the potential return greatly outstrips the geopolitical risk.
  • To do this, revenues need to start growing again which in turn requires the economy to turn around.
  • Given, the CCP’s attitude towards the economy, this could be a pretty long wait and I don’t think that there is much that Eddie or Jack can do about that.
  • Hence, even if they right the ship, the actual recovery and its timing is out of their hands to a large degree.
• The net result is that Alibaba is in pole position to benefit when the Chinese economy recovers and having Jack Ma could add some juice to the scale of the recovery when it comes.
• However, there is no way to tell when this is going to happen, and China is probably one the most hated trades with international investors at the moment despite the pretty valid argument that China is lower risk now than it was 5 years ago.
• Alibaba’s multiples remain a small fraction of Amazon’s meaning that even a small mean reversion could trigger a substantial rally in the shares.
• I have a position and the time to wait.