Alibaba (NYSE: BABA), the Chinese multinational technology company, recently announced this week its plan to restructure into six different business units, a strategic move intended to enhance operational efficiency and drive long-term growth.
This is a big move for the company, which has hitherto functioned as a single organization, and the market responded warmly to the news, with Alibaba’s stock price soaring by 15% from $86.74 on Monday, March 27, to $99.88 by the closing bell on March 29.
It’s worth noting that this surge in price comes after a recent dip in the stock, with it trading as high as $120 in late January to as low as $81 as recently as March 20. As of Michael Burry’s filing on 2/24, BABA’s price was around 5% higher than its current price. However, the market’s positive response to the restructuring announcement suggests investors are optimistic about Alibaba’s prospects.
BABA stock outlook changes
Notably, BABA is one of Burry’s largest portfolio holdings, ranking fifth, and was a new buyback in Q4 2022. Burry, commonly known as “The Big Short,” tends to favor stocks that are trading at low valuations. In the legendary investor’s view, when a stock is trading at a cheap price, the management team only needs to execute a few things correctly to create substantial value for shareholders.
Alibaba’s recent spin-off into six distinct businesses serves as an example of how effective management can create value even when the stock is trading at an ultra-low valuation.
Indeed, the shift in outlook is primarily attributed to the “sum-of-the-parts” valuation method, which values a company by breaking down its various business units and analyzing them individually. Investors often view this method as a way to unlock hidden value within a company, and it appears that the market has well-received Alibaba’s restructuring.
Alibaba’s stock experienced a decline amid investors’ concerns that the Chinese government may expropriate the company from U.S. shareholders, with BABA trading in the low $60 region. However, the recent announcement of Alibaba’s restructuring into six separate entities may assuage some of these fears. With the company now divided, it would be even less probable for the CCP to appropriate all of them.
Alibaba, often referred to as the “Amazon of China,” currently boasts a price-to-earnings (P/E) ratio of 11x, which is significantly lower than Amazon’s (NASDAQ: AMZN) P/E ratio of 70x. While inherent risks are associated with investing in a Chinese company, Alibaba’s recent restructuring into six separate companies suggests that its management team is committed to driving shareholder value.
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