Breaking Up Big Tech

Alibaba stock has struggled for a long time now. Over the last five years, the U.S. listed shares of the Chinese tech giant have generated a negative annualized return of 11.7%, versus an annualized return of 10.4% for the S&P 500. That's not the kind of prize investors had in mind back in 2014 when Alibaba went public in New York in the largest ever U.S. IPO by proceeds raised ($25 billion). 

Alibaba's American Depositary Receipt has been a victim of politics and fears the company would be held back by Chinese officials. This morning, the company took a step to unlock some of its value by agreeing to split into six different units. That's a serious break-up and investors liked the idea, with shares surging 14% on the day. The new companies will cover cloud intelligence, internet retail, mapping, transactions, logistics, and digital media, my colleague Al Root reports.

Al writes: 

Tuesday’s rise creates roughly $30 billion in stock market value.

It was a shot in the arm the stock needed. Coming into Tuesday trading, Alibaba stock was down so far this year and off about 25% over the past 12 months. Shares were trading at about 10 times the per-share earnings expected for the calendar year, while over the past few years, the stock has traded for about 20 times the profit expected for the coming year.

Al notes that some U.S. tech companies could use a similar shot in the arm, namely Amazon.com: 

Amazon’s businesses look a lot like Alibaba’s, and vice versa. There is Amazon Web Services, a dominant provider of cloud-computing services, as well as a movie studio, logistics assets, internet retail, internet advertising, and third-party retail services.

Alibaba “gives a boost and positive signal to other big tech companies that they can also explore and consider breakup of their segments to create value,” said Jim Osman, founder of The Edge Research. The Edge specializes in corporate spinoffs and corporate transactions.

“If done successfully, Alibaba would stand as a great example for the conglomerates on value creation,” he told Barron’s.

Osman said that in a breakup scenario, Amazon Web Services and the rest of Amazon together could fetch about $200 a share in a couple of years. Amazon stock is currently a little below $100 a share and off about 50% from the record level of almost $189 reached in the summer of 2021.

The breakup math reminds me of a bullish story Eric Savitz wrote about Amazon last year. You can read that Barron's cover story here.