Why Alibaba's Buyback Might Not Mean Guaranteed Gains For Investors

Shares of Alibaba Group Holding Ltd BABA appear to have stabilized for the moment at around $75 after dropping to a new all-time low of $71.03 following a disappointing earnings report last week. The company is hoping that an announcement of a new $4 billion buyback program will help take some pressure off of the ailing stock, but the facts show that buybacks may not be a quick fix.

Offsetting dilution
Alibaba’s new buyback plan will help compensate for dilution from the company’s share-based compensation program. In addition to employee compensation, deals such as the recent acquisition of Suning Commerce Group also water down Alibaba’s stock. The Suning acquisition included the issuance of $2.3 billion new Alibaba shares to Suning, which offsets more than 57 percent of the $4 billion buyback plan.

Buybacks: blessing or curse?
Benzinga recently reported on the surprising underperformance among companies with large buyback programs. The group of 15 companies in the S&P 500 that reduced their number of shares outstanding by 10 percent or more in 2014 via buybacks has lagged the performance of the S&P 500 so far this year.

Challenges ahead
James Gellert, CEO of Rapid Ratings, believes that Alibaba’s disappointing revenue number from the most recent quarter is an indication of the difficulty a company the size of Alibaba has in maintaining sky-high growth rates. “Time will tell if their results are indicative of Chinese economic slowdown or Alibaba-specific challenges.”

Gellert’s point about the size of Alibaba appears to ring true when it comes to share price. In both size and scope of operations, Alibaba dwarfs smaller Chinese e-commerce rival JD.com Inc JD. However, while Alibaba’s share price has fallen more than 28 percent in 2015, JD’s shares are up 19 percent.