Alibaba (NYSE: BABA) shares have performed weakly for a good few years now. In fact, they’re not far above the price they debuted at on the public market back in September 2014.
Recently, however, the stock has been rising after the Chinese tech conglomerate said it plans to split its business into six separate units.
The shares are up 11% since this plan was announced last month. Over six months, they’re up 34%. That means I’d have £2,680 today if I’d invested £2,000 in Alibaba shares six months ago.
The company doesn’t pay dividends.
Sharks and crocodiles
Jack Ma co-founded Alibaba in 1999, starting it from his apartment in Hangzhou, near Shanghai. The fact that over the next decade and a half it managed to outcompete both eBay and Amazon in China is extraordinary.
But Ma was always confident his company would beat its foreign e-commerce rivals on home soil. He said: “eBay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win.”
Today, Ma is no longer in charge of Alibaba and the tech giant has announced it will be splitting into six separate units. These will be:
- Cloud Intelligence;
- Taobao Tmall Commerce;
- Global Digital Commerce;
- Local Services;
- Cainiao Smart Logistics; and
- Digital Media and Entertainment
It’s expected each business will eventually seek a separate public listing. However, they’ll all still be under a common holding company.
In theory, this could unlock a large amount of value for Alibaba shareholders, especially considering its low valuation. The stock currently trades on a forward price-to-earnings (P/E) multiple of just 12.5.
For one of the largest e-commerce companies in the world, I reckon that’s dirt-cheap.
Scrutiny
The company’s radical restructuring follows two years of tough regulatory crackdowns on large internet companies in China. It is hoped this split will appease regulators and reduce scrutiny in future.
That may be turn out to be true. However, I’m not convinced, particularly after seeing the regulatory response to the company’s recent unveiling of Tongyi Qianwen, its answer to ChatGPT.
This generative artificial intelligence (AI) chatbot, which roughly translates as “truth from a thousand questions”, will soon be integrated into all of Alibaba’s products.
However, China’s cyberspace regulator was quick to respond: “Content generated by generative artificial intelligence should embody core socialist values and must not contain any content that subverts state power.”
I fear the constant regulatory scrutiny (and fines) placed upon tech companies in China may eventually stop them taking bold, innovative risks.
That said, robust regulation makes it extremely unlikely that foreign AI companies will ever succeed in China, thereby cementing Alibaba’s competitive position.
Will I buy Alibaba shares?
Normally, I’d be extremely keen to invest in a firm with a market-leading position in a gigantic $2trn market (the size of China’s e-commerce market).
But to me, Alibaba serves as a reminder that a great business doesn’t necessarily make for a great long-term investment. The way that government regulation can negatively impact Chinese stocks continues to put many investors off, including me.
As things stand, there are too many risks for me to buy Alibaba shares. I’ll be investing elsewhere.
