Alibaba (NYSE: BABA) announced on April 2 that it made $4.8 billion in share repurchases in the first quarter of 2024, the second-largest quarterly share buyback in its history. This is likely a down payment on the $25 billion increase in the share buyback program revealed in its fourth-quarter 2023 earnings announcement in February.
However, the market's reaction to this news was tepid, and as of this writing, the stock has fallen on the news. This continues Alibaba's struggles, a stock that has suffered a net loss since its initial public offering (IPO) in 2014. Knowing its history, is the share repurchase the move the Chinese e-commerce retailer and cloud service provider needs to inspire a recovery, or should investors remain on the sidelines?
Why the buyback will not matter to some investors
From a certain point of view, investors' non-reaction to the massive stock buyback is unsurprising. This is because the move does nothing to address the perception that Alibaba and other Chinese stocks are uninvestable.
This sentiment stems from the precarious state of U.S.-China relations. The problem directly affected the investment world in 2022 when U.S. regulators threatened to delist Alibaba and several other Chinese stocks if they could not access Chinese companies' audits.
That situation added risk to Alibaba since Alibaba shares are not a direct ownership stake in the company. Instead, Alibaba and many other international stocks are American depositary receipts (ADRs), shares issued by a bank that has a business relationship with Alibaba. Although ADRs typically benefit shareholders, they become riskier if the odds of delisting rise.
Fortunately for Alibaba and other stocks, an agreement between the U.S. and China averted the removal of Chinese shares. However, it also served as a reminder of the risks of owning Alibaba stock.
Moreover, Alibaba has been at odds with China's government in recent years. In 2020, the government began an antitrust investigation into Alibaba, which led to an 18 billion renminbi ($2.8 billion) fine in 2021.
Also, around the time that founder Jack Ma stepped down as chairman of Alibaba Group, he disappeared for several months after criticizing the Chinese government. That coincided with the cancelation of the IPO of Ant Group, an affiliate company of Alibaba run by Ma, which was another major setback for the parent company.
Making sense of the Alibaba risk premium
Nonetheless, despite the many challenges, investors are also right to question whether the risks are already priced into Alibaba stock. As mentioned, shares have lost value over the last decade. Still, during that time, revenue grew from 19 billion renminbi ($2.6 billion) in 2013 to 260 billion renminbi ($36 billion) in 2023, a 13-fold increase in 10 years.
Also, net income rose from 8 billion renminbi ($1.2 billion) in 2013 to 46 billion renminbi ($6.3 billion) last year. While that is slightly more than a fivefold gain, it is remarkable that the stock is worth less despite that growth.
So deep is the multiple compression that a price-to-earnings (P/E) ratio that routinely exceeded 40 in its early years now stands at just 13. Although that earnings multiple includes a significant discount for the risks involved, a recovery could bring outsize gains. That possibility may prompt some investors to buy into the share repurchase.
BABA PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
Does the repurchase make Alibaba stock a buy?
Due to the geopolitical risks involved, risk-averse investors should avoid Alibaba stock under any circumstances. However, risk-tolerant investors willing to take a chance on the stock could make a case for investing speculative funds in Alibaba.
Although investors should not dismiss risk, risk premiums have a limit, and Alibaba has arguably reached beyond that level. With the financials showing massive growth not reflected in the stock price, Alibaba could deliver significant returns simply by averting worst-case scenarios.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
