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(Bloomberg Opinion) -- After its $11.2 billion Hong Kong share sale, Alibaba Group Holding Ltd. will be sitting on $43 billion in cash. That sounds like a great problem to have. Only one publicly listed, non-financial company has more: Apple Inc., at $49 billion.
Then you realize that management literally has more money than it knows what to do with. Chief Executive Officer Daniel Zhang and Maggie Wu, the chief financial officer, have three choices:
Do nothing. Just sit on that cash in a low-interest-rate world. Spend it. On acquisitions and marketing; historically, this has depressed margins. Give it back. Dividends, maybe, but more likely, buybacks.
Let’s go through them.
Sitting on that cash is really the easiest, most unimaginative thing to do. But no one says they can’t.
Spending it is definitely in the cards. Alibaba said in its prospectus that it plans to use the proceeds for “driving user growth and engagement, empowering businesses to facilitate digital transformation and improve operational efficiency, and continuing to innovate.”
That first point, driving growth, is really just banker-babble for marketing and acquisitions. In the past few years, Alibaba has laid out money for food delivery (Ele.me), groceries (Freshippo), logistics (Cainiao) and others. It’s also spent significantly to battle new rivals like Meituan Dianping and Pinduoduo Inc. This expenditure has been a major reason why top-line growth has stayed so strong. If not for these new revenue streams, Alibaba’s 40% growth last quarter would have been closer to 30%.(1)
That “digital transformation” it talks about includes helping grocery stores getting into delivery (Taoxianda) and building out its still-unprofitable cloud business. Meanwhile, “continuing to innovate” means whatever you want it to mean.
All these initiatives, while strategic and logical, have had the effect of cutting its operating margin in half over the past five years. It’s highly likely that if Alibaba continues spending at this pace, it would do so on less-lucrative businesses that could take even longer to prove profitable.
Which leaves the final option. Return the money.
Pause for a moment to appreciate the irony of a company selling $11 billion of shares to then turn around and buy back shares. Yet Alibaba will be listed on two major bourses — Hong Kong and New York. By using the Hong Kong money to cut the New York float, Alibaba can start to shift its investor base closer to home in China, which was a key purpose of this offering.
It may sound ridiculous that a company which has climbed 22% over the past year, trades at around 24 times estimated earnings, has a return on capital of 19.7%, and return on equity of 29.8% should consider spending money to prop up its stock. Yet there are two things to consider: Its shares have moved sideways over the past two years, and there’s precedent for solid companies to do this.