Alibaba must find ways to spend its massive cash reserves

through them. Sitting on that cash is really the easiest, most unimaginative thing to do. But no one says they can’t.

Spending it is definitely in the cards. Alibaba said in its prospectus that it plans to use the proceeds for “driving user growth and engagement, empowering businesses to facilitate digital transformation and improve operational efficiency, and continuing to innovate.”

Acquisitive

cash reserves of Alibaba group after share sale

It’s also spent significantly to battle new rivals like Meituan Dianping and Pinduoduo Inc. This expenditure has been a major reason why top-line growth has stayed so strong. If not for these new revenue streams, Alibaba’s 40 per cent growth last quarter would have been closer to 30 per cent. That “digital transformation” it talks about includes helping grocery stores getting into delivery (Taoxianda) and growth in Alibaba revenue in the last quarter building out its still-unprofitable cloud business. Meanwhile, “continuing to innovate” means whatever you want it to mean.

All these initiatives, while strategic and logical, have had the effect of cutting its operating margin in half over the past five years. It’s highly likely that if Alibaba continues spending at this pace, it would do so on less-lucrative businesses that could take even longer to prove profitable. Which leaves the final option — Return the money.

Pause for a moment to appreciate the irony of a company selling $11 billion of shares to then turn around and buy back shares. Yet Alibaba will be listed on two major bourses “- Hong Kong and New York. By using the Hong Kong money to cut the New York float, Alibaba can start to shift its investor base closer to home in China, which was a key purpose of this offering.

It may sound ridiculous that a company which has climbed 22 per cent over the past year, trades at around 24 times estimated earnings, has a return on capital of 19.7 per cent, and return on equity of 29.8 per cent should consider spending money to prop up its stock. Yet there are two things to consider: Its shares have moved sideways in the past two years, and there’s precedent for solid companies to do this.

Buy-backs can sometimes be seen as a way for troubled companies to prop up their share price, like Baidu Inc., which has dropped 38 per cent in the past 12 months amid falling revenue and profits. Yet plenty of solid companies with great financials do the same, especially when there’s a dearth of better places to put the money.

This would signal to Alibaba’s new Hong Kong investors that it’s willing to back them up, and has a war chest to do so.

Sure, Alibaba doesn’t need buy-backs. But it doesn’t need $43 billion in cash, either.