If you're trying to time Alibaba's stock, keeping an eye on Jack Ma may be a good strategy.
Chairman Ma and Vice Chairman Joseph Tsai are throwing their own money into a $500 million pot of Alibaba funds to buy back the company's shares. Alibaba announced the $4 billion, two-year share repurchase program in August, with a filing a few days later showing Ma and Tsai would participate via affiliates.
While Alibaba's stated motive for the buyback is to offset dilution from share-based compensation programs, the company may also have an eye on propping up a stock that's been trading below its $68 initial public offering price. The stock climbed 2.8 percent after yesterday's announcement to close at $68.81 in New York.
While the first tranche of the Ma-Tsai-Alibaba purchase is equal to less than 0.3 percent of Alibaba's market cap, the sight of the company's two most senior executives dipping into their pockets to support the stock is likely to cheer investors. (Alibaba's statement didn't say how much of their own money the executives are putting in.)
The numbers suggest it may be a shrewdly timed purchase. At 21.6 times forward 12-month earnings, Alibaba's stock is bouncing off historic valuation lows and remains well below the 25.3 times daily average since its September 2014 listing. The Bloomberg China-U.S. Equity Index trades at an average of 27.5 times forward earnings.
Following the chairman's money may prove a better strategy than listening to the advice of sell-side analysts, who remained resolutely optimistic as the stock slumped by more than half from its November 2014 peak. Of 45 analysts tracked by Bloomberg, 40 have a ``buy'' recommendation and five rate the stock a ``hold.'' Since the last ``sell'' recommendation dropped off the radar in May, Alibaba shares have lost 23 percent.
At least analysts have moderated their price targets: The 12-month average now stands at $92.81, down from $109.57 in May.
The reasons for Alibaba's stock malaise are well documented. China's economy has slowed, while the company's already massive size makes further growth increasingly difficult (transactions over its platforms accounted for more than 11 percent of China's total retail sales in the December quarter). Competition in e-commerce has intensified, and the trend toward online-to-offline services is demanding increased spending.
In evaluating the potential upside, another technology titan may provide an instructive parallel. Back in 2013, Apple was beset by investor anxieties. The company -- already the world's biggest by market value -- was supposedly approaching the limits to growth, demand for the iPhone was reaching saturation point and the device was losing popularity to Samsung handsets and cheaper smartphones.
Apple's price-earnings multiple fell below 10 in the first half of 2013 and by the third quarter the highest ratio of analysts in five years rated Apple a ``sell'' (a whopping 6.7 percent). Subsequently, iPhone sales boomed again and the stock doubled in less than two years.
Jack Ma will be hoping for a similar outcome this time.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Tim Culpan in Taipei at firstname.lastname@example.org
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