When the Persian woodcutter Ali Baba found a cave full of treasure hidden in the forest, he didn't spend it all at once. He took home just enough to live on comfortably, and passed on the secret to his children, and his children's children, and his children's children's children.
That's a good way of making the most of a finite store of wealth. So it's striking that Alibaba, the Chinese e-commerce company whose accounting is under investigation by the SEC, has taken exactly the opposite approach.
The company raised $25 billion in the world's biggest initial public offering. Billions more have come in since then through bonds and loans. Suppose the core business isn't making as much as investors suppose. What do you do with the cash?
Skeptics have frequently raised questions about Alibaba's numbers. Its growth seems improbable and figures for spending strain credulity, Barron's argued last September. "The numbers are wonky," according to John Hempton, of Sydney-based fund Bronte Capital. Jim Chanos, the hedge fund manager who made his name betting against Enron, is shorting the stock "for accounting reasons," he told CNBC earlier this month.
If you wanted to keep all your plates spinning for as long as possible -- perhaps long enough for the core business to catch up with the world's perception of it -- kicking all that cash back out the door on acquisitions would be an odd method. But that's what Alibaba's been doing.
Since its September 2014 IPO, the company has shelled out $24 billion for acquisitions, according to data compiled by Bloomberg. Alibaba's New York-listed shares, on an average forward P/E multiple of 28 since listing, represent a pretty attractive acquisition currency that could be used in place of precious cash reserves. In fact, all but $530 million of the total has been plain-vanilla cash deals, the data show:
Nor is Alibaba buying into obscure private companies. About $12 billion of its post-IPO acquisitions have been of shares traded on public markets, such as those of the online video company Youku Tudou, the dating app Momo, and the baby-clothes retailer Zulily.
Its private deals have been solid, too: In the last six months alone, Alibaba put down $1 billion on the ride-sharing app Lyft and another $1 billion on Lazada, a Southeast Asian online retailer whose shareholders, including Tesco, Rocket Internet, and Investment AB Kinnevik, presumably would notice if they weren't getting paid.
The deals don't make much sense as a way of bringing other companies' cash flows in-house, either. The three public companies Alibaba has taken control of since its IPO -- Youku Tudou, Momo, and the Chinese lotteries business AGTech -- have racked up net losses of $361 million over the past eight quarters, while operating cash flows came to just $61 million, according to data compiled by Bloomberg. That's a poor return on the $6.8 billion in cash it paid for them.
Here's an alternative theory: Regardless of any potential issues around how it accounts for its affiliated logistics business and some of the hard-to-compute numbers generated by its Singles Day promotion, the major issue worrying Chairman Jack Ma is that Alibaba is approaching the limits to growth in its core business. It has an already dominant market share, and Chinese retail spending looks to be nearing a peak.
Alibaba generates a lot of cash and is spending it looking for new revenue streams to justify the ample valuation it's been given by public markets. Investors should stop wasting time worrying about whether the company is a house of cards, and start asking the harder questions about whether its boring old core business is running out of puff.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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