Alibaba‘s (NYSE: BABA) stock surged 14% on March 28 after the Chinese e-commerce and tech giant announced that it would split its business into six new groups: Cloud Intelligence, Taobao Tmall Commerce, Local Services, Cainiao Smart Logistics, Global Digital Commerce, and the Digital Media and Entertainment Group. All six groups will be led by separate CEOs, and most of them will pursue fresh funding from external investors or public stock listings.
In a letter to his employees, Alibaba CEO Daniel Zhang said the restructuring would enable the company to become “more agile, shorten decision-making links, and respond faster” to all the changes in the market. But will this move actually light a fire under Alibaba’s stock, which remains nearly 70% below its all-time high from October 2020?
Image source: Alibaba.
This isn’t a fresh strategy
Alibaba’s separation into six new units marks its biggest restructuring in its 24-year history, but we’ve already seen its industry peers do similar things before.
Back in 2018, Tencent (OTC: TCEHY) reduced its total number of business units from seven to six by merging some of its businesses, and that restructuring enabled it to expand its non-gaming units to reduce its exposure to China’s tighter gaming regulations at the time. It also spun out Tencent Music (NYSE: TME) in a new initial public offering (IPO) on the NYSE that year.
Alibaba’s e-commerce rival JD.com (NASDAQ: JD) also launched fresh IPOs for its healthcare and logistics arms in Hong Kong in 2020 and 2021, respectively. However, a planned IPO for JD’s fintech arm was hastily scrapped after Chinese regulators unexpectedly scuttled the IPO of Alibaba’s fintech affiliate Ant Group in late 2020.
Just like Tencent and JD, Alibaba’s restructuring won’t affect its investors too much. Alibaba will still be the parent holding company of all six companies in the same way that Alphabet owns Google and its smaller sister companies. All its new CEOs will still report to Daniel Zhang, who will serve as the CEO of both Alibaba and the new Cloud Intelligence Group.
Will this restructuring resolve Alibaba’s problems?
The biggest headache for Alibaba right now is the sluggish growth of its Chinese commerce business, which generates most of its revenue from its Taobao and Tmall online marketplaces. That segment accounted for 69% of its top line in fiscal 2022 (which ended last March), but it’s been hit by slower consumer spending in China, disruptions from COVID-19 lockdowns, and intense competition from JD, Pinduoduo, and other e-commerce marketplaces over the past year. To make matters worse, China’s antitrust regulators have also been squeezing Alibaba’s commerce business with fines, restrictions on its exclusive deals with merchants, and tighter rules for its loss-leading promotions.
Alibaba’s Chinese commerce revenues rose 18% in fiscal 2022 but only grew 1% year over year in the first nine months of fiscal 2023. That slowdown is worrisome because Alibaba generates all of its profits from the Chinese commerce business, which subsidizes the expansion of its unprofitable cloud, digital media, and innovation-initiatives businesses. Its higher-margin Chinese e-commerce revenues also offset the lower margins from its brick-and-mortar stores, cross-border marketplaces (AliExpress and Kaola), and its overseas marketplaces (Lazada in Southeast Asia and Trendyol in Turkey).
Alibaba expanded those lower-margin segments to offset the slowing growth of its Chinese commerce business, but that expansion has significantly reduced its operating margins since its IPO in 2014:
Source: YCharts.
Faced with that persistent pressure, it’s smart for Alibaba to split its business into six separate units which can scale up their businesses, attract more external investors, and raise fresh cash with new IPOs on their own. It would likely grant investors a clearer view of the growth and profitability of each of its smaller business divisions, and it could even placate China’s antitrust regulators by splitting up its sprawling and market-dominating ecosystem.
But this change won’t supercharge its stock
Alibaba is taking a few steps in the right direction, but its near-term growth should remain sluggish as it weathers the macro and competitive headwinds. Analysts expect its revenue and net income to rise 2% and 12%, respectively, in fiscal 2023.
In fiscal 2024, they expect its revenue and net income to rise 10% and 62%, respectively, as China experiences a post-COVID recovery and its core businesses gradually stabilize. Its stock still looks cheap at 16 times next year’s earnings, but investors will likely continue to avoid Alibaba until its Chinese commerce business stabilizes and the delisting threats against U.S.-listed Chinese stocks are finally resolved. As for its restructuring efforts, its new business units could also struggle to secure fresh funding or list their shares until the macroeconomic environment improves.
In short, Alibaba’s restructuring is a smart business decision which could streamline its massive business, but it definitely won’t resolve its near-term problems or supercharge its stock this year.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, JD.com, and Tencent. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
