Even Alibaba Will Have a Favorite Child or Two

Bloomberg2023-03-30

Two days after the surprise announcement that it will split into six units, Alibaba Group Holding Ltd. is still not giving much away about how this new business will operate. Yet its track record and ...

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Shirley Soh
·2023-03-30
Ok
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Longs
·2023-03-30
👌🏼🙏🏼
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sjsjsj
·2023-03-30
That was quite an insightful write-up...
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Yet its track record and ...</p>\n\n<a href=\"https://www.bloomberg.com/opinion/articles/2023-03-30/alibaba-the-split-should-raise-a-red-flag-to-investors\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"09988","symbol_name":"阿里巴巴-W","start_time":0,"source_url":"https://www.bloomberg.com/opinion/articles/2023-03-30/alibaba-the-split-should-raise-a-red-flag-to-investors","article_id":"1160443789","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=1160443789","pubTimestamp":1680167179,"sourceInfo":{"source_id":"lsy1584095487587","name":"Bloomberg"},"weMediaInfo":null,"summary":"Two days after the surprise announcement that it will split into six units, Alibaba Group Holding Lt","collect":0,"end_time":0,"defaultTopTitle":"bloomberg.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"09988":"阿里巴巴-W","BABA":"阿里巴巴"},"translate_title":"即使是阿里巴巴-SW也会有一两个最喜欢的孩子","themeId":"dabeb085ccdd4624b7403eda55608461","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"09988":0.9,"BABA":0.9},"content_text":"Two days after the surprise announcement that it will split into six units, Alibaba Group Holding Ltd. is still not giving much away about how this new business will operate. Yet its track record and early comments indicate that some of these Baby Babas will be more highly prized than others.Only Chief Executive Officer Daniel Zhang and Chief Financial Officer Toby Xu spoke on a conference call Thursday, and it lasted just 30 minutes. That none of the new business heads joined to outline their vision was a disappointment.What we did learn is that the break up will be immediate. Alibaba’s financial year commences on April 1, Zhang said, which helps explain the timing of the announcement and gives meaning to the word “Holding” in the company’s name. Going forward, it will comprise: Taobao Tmall Commerce, Global Digital Commerce, Local Services, Cainiao Smart Logistics, Cloud Intelligence and Digital Media & Entertainment.Taobao Tmall is the only one excluded from the freedom each group will now have to spin off and IPO independently. Taobao is the crown jewel, accounting for 67% of revenue and more than 100% of its operating profit. That latter figure is not a typo; every other business burns money, with Cainiao the smallest loser.A Huge Difference Between Big & SmallAlibaba's children vary greatly in size and contribution, with local commerce the major driver.Zhang believes the synergies across divisions will remain. This pronouncement seems heartening, on the one hand, yet confusing and unworkable on the other. Alibaba benefits from the ability to send users from its shopping platform to the logistics service, leverage its China business to build an overseas presence, use media and entertainment as a lure for customers, and run it all on a single cloud provider. How this can continue once each is independently run will determine the future value of both Alibaba Group and these divisions. Keeping that interconnection will also remain an antitrust risk, a concern that was likely one of the sparks for this breakup in the first place.Alibaba's One-Hit WonderJust one division is profitable. Everything else drags on earnings.“There are very stable cooperative relations across businesses, they serve one another, they work together,” Zhang said. All of Alibaba’s businesses are on Alibaba Cloud, for example, “and that’s created a lot of efficiency, including lower cost.” It’s notable that after the split, Zhang will be head of the new Cloud Intelligence business, in addition to his ongoing role atop the group.That reliance on cross-company relations ought to serve as a red flag to investors. It’s one thing to benefit from synergistic efficiencies, but it’s altogether another matter if business leaders are then handcuffed to vendors within the group. The Cloud unit lost 4.2 billion yuan ($609 million) in the nine months to Dec. 31. It’s not a stretch to imagine that this business is pricing its services at a favorable rate so that others in the group, such as the loss-making entertainment division, can lower costs. Conversely, the cloud unit gets a huge benefit by having the rest of the conglomerate send their business its way, instead of choosing alternative vendors. Investors need to consider what might happen if each group was given the freedom to choose another cloud provider, including from arch rival Tencent Holdings Ltd. If, for example, Alibaba’s cloud service is not priced at a favorable rate then there’d be every incentive to go into the market to shop for a better deal.This interconnection may also be skewing the business model and financial results of those smaller units. Taobao Tmall is the cash cow, and everyone else feeds off it in one way or another.Like many companies, Alibaba likes to play up non-standard earnings metrics to make the case that some divisions aren’t really losers after all. This is particularly relevant for Alibaba Cloud, where they also present a metric that strips out the cost of share-based compensation and amortization of goodwill. On that basis, the cloud business looks profitable. But let’s not be fooled. Paying employees is not some optional expense that can be removed just because a portion of that compensation is given as shares.In fact, a closer look at this single data point reveals just how much Alibaba leans on equity as a way to pay staff while minimizing the drain on cash, a common tactic deployed to lure talent in a particularly competitive sector. Share-based salary stands at around 9% of revenue, compared to just 1.44% for the hugely lucrative Taobao Tmall, which enjoys 30% operating margins. Removing this line item will likely make the future Cloud Intelligence Group cash-flow positive, but that doesn’t mean it’s wildly profitable, or will be anytime soon.Head in the CloudsAlibaba's Cloud division pays a much higher rate of share-based compensation, an indication that the battle for talent is tougher in this division.This break up, if it includes IPOs of individual divisions, makes share-based compensation even more relevant. Employees, who are the key to success in a services business like Alibaba’s, will likely have their salaries more closely tied to the fortunes of the individual unit, rather than the profitable group. If the value of those shares and options fall, then staff may start looking elsewhere.The problem will be particularly acute in divisions where equity is a larger part of the pay packet. That then incentivizes the holding company — the controlling shareholder for the foreseeable future — to look favorably upon some divisions at the expense of others. This is common in families with many siblings, but it’s no way to run a business.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9941630398,"gmtCreate":1680182688614,"gmtModify":1680182693542,"author":{"id":"4100664503126340","authorId":"4100664503126340","name":"Shirley Soh","avatar":"https://community-static.tradeup.com/news/784ec5f33096066f43c22d219e548bac","vip":1,"crmLevel":8,"crmLevelSwitch":1,"idStr":"4100664503126340","authorIdStr":"4100664503126340"},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9941630398","repostId":1160443789,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9941694080,"gmtCreate":1680181910541,"gmtModify":1680181914365,"author":{"id":"4115290449563752","authorId":"4115290449563752","name":"Longs","avatar":"https://community-static.tradeup.com/news/824b5073731ab909a8d4e129caa8d995","vip":1,"crmLevel":6,"crmLevelSwitch":0,"idStr":"4115290449563752","authorIdStr":"4115290449563752"},"htmlText":"👌🏼🙏🏼","listText":"👌🏼🙏🏼","text":"👌🏼🙏🏼","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9941694080","repostId":1160443789,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9941608431,"gmtCreate":1680174496523,"gmtModify":1680174500357,"author":{"id":"4110855522753532","authorId":"4110855522753532","name":"sjsjsj","avatar":"https://community-static.tradeup.com/news/5b28fa3a14f65b1818e59048a05a22ed","vip":1,"crmLevel":5,"crmLevelSwitch":0,"idStr":"4110855522753532","authorIdStr":"4110855522753532"},"htmlText":"That was quite an insightful write-up...","listText":"That was quite an insightful write-up...","text":"That was quite an insightful write-up...","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9941608431","repostId":1160443789,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":31,"commentSize":3,"repostSize":3,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false}}