Alibaba Restructuring: What do analysts say? Let’s find out

Alibaba share price: The biggest restructuring in the company’s history?

Alibaba, a major player in the Chinese e-commerce and technology market, recently disclosed that it plans to split its business into six distinct segments, a move that investors view favorably as a means to unlock the company's value. 

Alibaba announced its restructuring plans on Tuesday, March 28, which pushed its share prices 14.3% higher, representing the stock's most exceptional performance in nine months. The restructuring offers an opportunity for Alibaba's six divisions to raise funds or go public, providing greater transparency on the formerly concealed subsidiaries within the company's multibillion-dollar conglomerate structure.

In the last couple of years, Alibaba's shares have experienced a substantial decline due to regulatory pressures. Chinese regulators have time and again imposed strict restrictions on Chinese companies which have a presence outside of China in the pretense of risks of information leak. 

For instance: Alibaba’s US listed stocks have lost about 40% of its value over the past five years and have dropped 15% over the past one year. 

Alibaba: 1-year historical share price

Alibaba Restructuring: Holding company playbook?

Until now, Alibaba was a single business entity, having a range of businesses like e-commerce, cloud computing, local services, digital media all under one umbrella. 

What Alibaba is trying to do is create a holding company which in turn will control all the new six units that the company will create. Most possibly, it will be one company taking entire ownership of a certain business vertical with its separate management and listed separately on stock exchanges. 

Alibaba Restructuring: Will Alibaba’s valuation metrics change?

Since Alibaba is moving towards a holding company or a conglomerate pattern of business where there is one holding company having control over multiple subsidiary firms, the valuation metrics will also change a little. 

The price to equity ratio (P/E) ratio is generally the most commonly used valuation metric to see if any company’s stock price is in tandem with its earnings. It shows if a stock is overpriced or undervalued. However, this metric works better as it takes a business as a whole and might overlook some factors. 

Analysts believe Alibaba stock might be valued as the sum of the parts (SOTP) which allows traders and investors to price in each of the different elements of Alibaba’s business. 

Alibaba Restructuring: Will it reduce regulatory scrutiny from Chinese authorities?

Alibaba's restructuring is set to increase its flexibility, provide a rise to healthy competition within the Chinese technology ecosystem, which in turn is expected to minimize potential regulatory risks. 

Alibaba's CEO, Daniel Zhang, hopes to streamline the organization and make it more agile. Alibaba's goal of increasing competition may also be seen as an attempt to satisfy Chinese bureaucrats, who have been scrutinizing the tech industry for nearly three years, which has mostly been the reason for Alibaba stock to consistently drop. 

Alibaba Restructuring: Analyst view

• J.P. Morgan has an ‘overweight’ rating on the firm with a share price target of $140. The brokerage expects that the reorganization will boost sentiment and stock while also consistently lifting margins at group level in future.
• Jefferies has a ‘buy’ rating on the firm with a share price target of $220. The brokerage expects the reorganization will help different business units to respond quickly to market changes and enhance decision making, unlocking valuations.
•  Bank of America Global research in a note explained that Alibaba’s breakup may be an important experiment for China's internet sector. Investors will look to see if a split-up could be a potential solution to reduce anti-trust concerns, policy risk and perhaps create more investment opportunities in the internet sector. 

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.