Source: PaxForex Premium Analytics Portal, Fundamental Insight
Alibaba, a leading player in e-commerce and cloud computing, boasts a captivating corporate history. The brainchild of an unconventional Chinese entrepreneur, Jack Ma, the company attracted investments from the likes of Yahoo and SoftBank during its early days. Nevertheless, it wasn't until its 2014 initial public offering (IPO) - which raked in a record-breaking $22 billion - that Alibaba entered the public consciousness in a significant way.
In a surprising move, Alibaba recently disclosed that it is undergoing an organizational revamp. Let's delve into the implications of this development and assess whether investing in the stock is a wise move.
Although Alibaba has diversified its offerings well beyond e-commerce over the past decade, the company has been struggling to generate substantial growth for the past few years, a trend that is reflected in its stock price. In fact, since its IPO, the stock has decreased by 5%.
The current situation with Alibaba indicates that all the shareholder value the company once created has been erased, even if the degree of the sell-off may be exaggerated. While it's important to acknowledge that Alibaba is a Chinese company and likely experienced the impact of COVID-19 lockdowns, the fact remains that it has been struggling even as pandemic fears diminish. Consequently, the company's management is at a critical turning point.
Recently, Alibaba announced a significant restructuring plan that involves dividing the company into six distinct entities, each focused on one of its core divisions. As per CNBC's coverage of the story, these divisions will include cloud computing, e-commerce (Taobao Tmall), digital media, digital commerce, Cainiao logistics, and local services. Each entity will have its own Board of Directors and CEO.
There has been speculation about why Alibaba decided to pursue this course of action. Although some suggest that the restructuring is a response to the company's declining growth, others posit that it could be an attempt to address Alibaba's perceived monopoly status, given its size and the scrutiny it receives from the Chinese government.
After the announcement of the restructuring plan, research analyst Scott Kessler suggested that the Chinese government may have played a role in endorsing the move. The underlying rationale for this organizational overhaul is to allow each division to operate independently, almost like its own company.
This implies that the six new CEOs will have unique perspectives, enabling their respective entities to make swift decisions and compete more effectively with other cloud and internet companies. Essentially, the different segments will have the autonomy to create dedicated budgets, identify crucial initiatives, and raise funds from their own investor groups. The ultimate aim may be to spin off Alibaba and list each entity on a public exchange separately.
The possibility of Alibaba spinning off and listing six different companies is captivating. Unlike an initial public offering (IPO), investing in a spinoff allows investors to be among the first to buy into a fresh growth narrative. However, it's important to bear in mind that when a company goes public, the founders and early investors have the option to sell their shares, and therefore, investing in a spinoff doesn't necessarily mean that one is getting in on the ground floor.
Jim Osman, a consultant at The Edge Group, shared a similar view during a recent interview with CNBC. Osman advised investors to swap their shares in the parent company for shares in the spinoff entities, should an opportunity arise.
Osman also noted two recent spinoffs from United Technologies, Otis Worldwide, and Carrier. Since their public listings in 2020, Carrier has returned over 250% to investors, while Otis has returned over 80%. These returns are not entirely unexpected, as both companies were previously part of a larger conglomerate. However, as separate entities, each firm now has the potential to redefine itself and operate as a growth company.
Investors will need to exercise patience to determine if Alibaba's restructuring plan is successful. Existing shareholders should hold on to their shares and evaluate future earnings reports. This will enable them to determine if exchanging their shares in the different entities is a viable option when the time comes.
On the other hand, prospective investors may want to wait and observe future earnings reports to evaluate each division's potential. This will help investors to identify which entities are of interest to them. It may be prudent to invest in Alibaba before any potential spinoffs and separate listings, but only after careful consideration of the spinoff entities that make it onto their investment radar.
While the price is below 88.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 82.68
- Take Profit 1: 79.00
- Take Profit 2: 74.00
Alternative scenario:
If level 88.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 88.00
- Take Profit 1: 94.00
- Take Profit 2: 99.00
