Motley Fool Hidden Gems Investing - Alibaba Shakes Things Up

Episode Date: June 22, 2023

Alibaba shuffles the deck as it heads towards spinning off its cloud division. (00:21) Bill Mann and Deidre Woollard discuss: - Alibaba’s leadership changes. - The difference between spin-offs and IPOs for Alibaba shareholders. - If Amazon makes it too hard to unsubscribe from Prime. (15:50)  Deidre Woollard and Ricky Mulvey cover what happens when a stock trades under $1. Companies discussed: BABA, AMZN, WE, NKLA, VCSA, APRN Host: Deidre Woollard Guests: Bill Mann, Ricky Mulvey Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Alibaba is shaking things up and Amazon faces more scrutiny. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst Bill Mann. Bill, how are you today? Hey, Deidre, I'm great. How are you? I'm doing well. So this week has been an interesting one for Alibaba. We've got Chairman and CEO Daniel Zhang. He's stepping down to focus on the growth of the cloud intelligence business as it heads for a spinoff. And Eddie Wu is going to take over as CEO. Is this a case of Zhang kind of putting his energy towards what he sees as the biggest growth

opportunity? So I don't know how you could view this as being anything other than a demotion for Daniel Zhang. By formerly, I mean three months ago was to be the chairman of the entire entity, but they are instead putting Zhou Tsai back into that role. I suspect that there are political reasons for doing so. We are talking about China, so a lot of times, a lot of the sensitivities, particularly with a business as large as Alibaba and as meaningful as Alibaba is to the economy of China, have to do with relations between the companies and the government. There's a lot that we don't know here, but in a lot of ways, the person who is in this role right now is trying to steady a ship at Alibaba. They have had a very rough go of things. A lot of their divisions are

either loss-making or their most important division, which is Taobao, has seen earnings decline. I want to say negative earnings growth, but that's much easier put as an earnings decline. So, there's a lot to write here. And so, I think for Zhang, you really can't view this as being anything other than a demotion. He's focusing on cloud, which is a struggling part of their business. And I think that his future at the company is going to be very tightly linked with that. Interesting, because the memo that he released sort of definitely spun it the other way. So, they did some good PR there. Well, you bought it, I guess. Maybe I was the only one. No, no, no. I think that that's

probably true. And obviously, it's still a very high profile, very important position. What are they going to say otherwise, though? I mean, so, essentially, you have a company that's preparing to break itself up, and they made a decision three months ago, and now they are reconsidering that structure. And they are putting power into the hands of one of two permanent members, I should say, of the Alibaba partnership, which is the longstanding kitchen table group. I think there are 29 members now, but the only permanent ones are Jack Ma and Joseph Tsai. So, they're putting more official responsibility upon him as well. Well, let's talk about that because Jack Ma, he was being a visiting professor in Tokyo recently. Then this week, he's been

photographed with Joseph Tsai. How should we consider Jack Ma as part of the story? It's hard to say because he essentially disappeared. And by essentially disappeared, he actually physically disappeared for a long time after some comments that he made about the banking system in China that were taken as being impolitic, which is a cardinal sin in China. So, he has been in the background for a long time. He still owns 2.5% of the company, roughly. And he is a member of The Partnership, which is a pretty unique group where there are standing members. Again, it's just those two and then other temporary members. Within the partnership, it is one member, one vote. He still has a fair amount of influence at Alibaba. I think

moving Joseph Tsai, who was Taiwanese-born, educated here in the U.S., into a much higher role as his role as a co-founder speaks a lot to how important Alibaba views this upcoming year and their impending breakup will be. Well, let's talk a little bit about that breakup. I guess they're restructuring into six different divisions. Some of them, it seems like, are headed for spinoffs more quickly, including the logistics division. had a line recently that I loved in another recording. You called Alibaba the circulatory system of the Chinese economy. So I'm wondering, which part of the circulatory system do you see spinning off first, and which ones are more appealing to you? It's really hard to say.

They have not been specific about what's getting spun off or what their process is going to be. And I think that this restructure in the C-level and the C-level plus has a lot to do with them considering what their ongoing process and strategy is going to be. We don't even really know whether companies are going to be spun off or whether they're going to be IPO'd. That matters for investors. Are you going to receive shares in a component of the current Alibaba, or is simply the company going to do an IPO in which the company would receive proceeds. For the most part, if you look at the six divisions, there are really two choices that you have. You either have companies or divisions that are making a lot of money but

aren't growing very quickly, and that's primarily Taobao and Tmall. The remainder are growing faster but are, at the present, unprofitable. That includes cloud. Then the final, the sixth division is media and entertainment, and that has been a terminally underperforming component of Alibaba. I suspect that that is something that may end up being sold. But of the ones that are of most interest to me, I think that I've got to go with Taobao and Tmall, and then following that, their logistics services, because those are two titles or two entities at Alibaba that are really hard to recreate. Let's talk about Tmall because they're launching Tmall in Europe and we don't have too many details on that yet. I guess there

is a test in Spain going on. All that I've seen so far is that the idea is to bring local products to local consumers. Well, yeah, that sounds good. But what about Tmall could give it an advantage in Europe? I don't know that there's going to be much of an advantage over the existing players with the exception of this. And it is that they have a massive checkbook behind them, that they have the capacity to launch at a scale that is almost unheard of or unmatched by existing competitors in the space. So, I think that the move into other geographies outside of greater China and East Asia has to do a little bit more with the slowing of the growth in its home region than it is a competitive advantage that they can bring to bear.

So, they're very much going to be a credible and powerful competitor here, but it is, in fact, a highly competitive environment to start with. But it's one where they think that they have some capacity to compete. Well, let's move on and talk a little bit about another e-commerce and cloud company, Amazon. Federal Trade Commission has taken action against the company for what it calls non-consensual subscriptions and cancellation trickery. Sounds dirty when you put it that way. Right? So this is over prime. And how much should we be taking the FTC seriously? They've gone after Amazon before. Recently, Amazon has paid about $30 million for child data concerns over Alexa, privacy concerns over Ring. What's the story here? Well, so I think you should take them

incredibly seriously. In fact, three months ago, the FTC filed a proposed rule provision, which would make it easier for consumers to click to cancel. Basically, the principle there is, however hard it is for you to subscribe to something, it should be that easy or easier to cancel. So, this is a broader rulemaking that came out, and they're getting comments on now, so that was the end of March. But for them to sue Amazon specifically tells you that that original rulemaking, who that was primarily targeted at. So, the suit itself makes for fascinating reading in some ways, to the extent that lawsuits ever make for fascinating reading, because there was an actual process in place called the Iliad flow, is what they called it

within Amazon. It's a reference to the Iliad and the Odyssey, which is the Odyssey being the journey and then the Iliad being the war, how hard it is for people to cancel. I think this is something that was coming anyway. This is a much more spectacular event in that they are actually going after Amazon. Whenever I see things like this, Deirdre, I don't know if you if you are in the same boat, whenever I see a company that makes it really hard to cancel a service, I view that as a sign of weakness for the company itself, right? If the level of faith that you have in your business or your product is that it should be hard for people to get away from you, I think that's a statement for the company itself and for the product itself.

So, the suit has just come out. I suspect that the suit itself is a way of pushing along the more omnibus, click-to-cancel rulemaking that the Federal Trade Commission wants to make. I think it's interesting because we've seen a switch with subscriptions from boxes to more entertainment and things like that. Do you feel like the subscription economy is changing as consumers start to maybe look at how much they're spending? I would say so. There's obviously a point of resistance. It was Jim Barksdale who once said in terms of entertainment that there are two ways to make money. One is to bundle and the other is to unbundle. I think that we have come to an incredibly unbundled situation with the consumption habits of, I'm going to speak

domestically of a lot of Americans. I have two kids in college and their textbooks are on a subscription basis, not on a buy a big piece of a former tree. I think at some point there's got to be some pushback. And it may just come in the form of rebundling a lot of things that have been unbundled. So this FTC thing, it came out at the same time that Amazon was announcing Prime Day. A lot of hype around Prime Day every year. It starts July 11th this year. Kind of seen as a bellwether. How are you thinking about e-commerce right now? And is there more pressure on Prime Day this year than maybe in past years? Oh, I don't know. I always view Prime Day as a way that Amazon could clear out its warehouses of stuff that hasn't been selling, which is,

I guess, a pretty powerful thing for a company to be able to do. Obviously, Prime Day in 2021 and 2022 were massive, I think, particularly at the tail end of the pandemic and us being shut into our houses, that was probably meaningful. I'm not sure. I mean, this is an entirely manufactured event, right? Like 100%. Hallmark wishes they had thought of doing something as powerful as Prime Day and turning it into a holiday. I wish I'd paid more attention to it other than to just be cynical about it. What is this, a random day in July when we could buy stuff and so more Amazon boxes will show up at our houses? Yes, I assume it's important for them. I also wonder how in the world it got to be so important as it is other than a

to go and get some bargains. Right. The media coverage of it gets kind of breathless, which I find interesting. The things that are sort of changing this year, though, one of them is that it's going to allow buy with Prime deals. So I'm wondering if that's going to make a difference because it'll be not just Amazon, but third parties as well. So that might be something to watch too. It really might be something to watch as well. I just, via con Dios, go and buy your stuff. I don't really know what more to say about Prime Day other than it has caused me over the last couple of years, whenever it has come up, it's been the kind of thing when I've rolled my eyes pretty hard, like another

great reason for us to buy some stuff. Which is what both Amazon and Alibaba seem to want from us. Sure. That might make them happy, but beyond that, for me, I'm not sure what the point of it is. All right. Well, thanks for the chat today, Bill. All right. Thank you. Many of the SPACs that hit the market in 2021 are now trading for under a dollar. What happens when a company faces delisting risk? I talked to Ricky Mulvey about what's next for some of these companies. Just because you got a place on a stock exchange doesn't mean you get to stay there. Deidre, some higher-profile companies have

received these delisting notices like Blue Apron, WeWork, and BuzzFeed. But let's go back a little bit. Where do you think the story starts? Well, the story kind of starts with the SPAC boom, right? We had all of these companies come to market without going through this sort of more rigorous IPO cycle. So we had over 600 SPACs go public in 2021. Not as many since then, obviously. But some of these companies were just not ready for primetime, I think. And the market has kind of reflected that. There was a report from SPAC Research in April that there were over 100 SPACs in the pennies per share club. And so, as these companies trade under a dollar, they can't continue to do that. There are rules for

both the New York Stock Exchange and the NASDAQ about that. And I think the $1 per share is interesting because the barrier makes sense because once you start getting in that $1 range, little swings in share price have just a massive impact on the folks who own the stocks. Yeah, absolutely. So you're a company, let's say you're, you personally, Deidre, you're a SPAC and you just got a delisting notice. What happens? What's the warning ticket you're getting from the NASDAQ or the New York Stock Exchange? Yeah. So you're getting this warning. It happens if you've been under a dollar for about 30 days and that opens for the NASDAQ, what they call a compliance period. So you've got 180 days basically

to write the ship one way or another. And then you could be eligible for a second 180-day period if all requirements are met. But once you're under $1 for 30 days, it starts this clock that then just keeps ticking. And you either have to take action or risk being delisted permanently. So, the company gets the delisting notice. They have some tricks up their sleeve to get back on the good side of the market officials. What can they do after receiving that notice? Well, a company can't really wait for a market to fall in love with it and just give it more money. So there's a couple of tricks. First one is a reverse stock split, which is just basically what it sounds like, is that you get more shares. And so that will boost

up the price. The other thing is companies are really trying to raise capital. So let's talk about Blue Apron. They just used both. So they did a 1 for 12 split. They also sold off part of their infrastructure to a company called FreshRealm for $25 million in upfront cash, another $25 million if they hit certain incentives. And then they're going to sublease some of that space that they sold back from FreshRealm. So they're trying to do both at the same time. And when you look at these companies, especially ones that don't have a lot of money right now and are in this under $1 category, they're basically trying to do both of these things at once. First, correct the problem, and then also make sure they have enough capital to keep going.

Yeah. What a darling that's fallen back to earth in the case of Blue Apron. I think at one point, it was worth about $6 billion. Now, in some of its quarterly releases, it's using the term in order to fund near-term operations, which is always a red flag, Deidre. Let's say a company fails at that. They're under $1 for more than a 30-day period. They can't get back on track. What happens to the company and the stockholders after a company is delisted from those exchanges? It is not good. They can trade over the counter. They can potentially come back. But the amount of companies that come back is pretty low. A lot of times, what you see is a Chapter 11 and a restructuring. Maybe they get bought by somebody. Once a company gets to

that point where they're officially delisted, that sort of is a real demarcation point. The market has lost faith, it's usually likely that the debt is out of control. Usually, maybe the best case scenario would be a buyout in that case. So, if you own the stock, what's important to look for if you're worried a company you own might be in danger of getting delisted? I would want to make sure that the company has a plan, and I would want to look and make sure that they have enough capital to keep going. So, you really want to see, do they have enough runway? How much debt do they have? When is that debt coming due? How much cash do they have? And also, sort of longer, what is the growth story? And is it realistic? Are they waiting

for the economy to shift or something like that? Or are they waiting for some other milestone to be achieved? So, you want to make sure that there's a plan, first of all, and that the financial backup the plan. One company with a, let's say, complicated growth story ahead of it that may be shuffle-stepping out of a delisting is WeWork, which has the most office space of any company in the United States. What are they doing to shuffle-step out of these delisting notices? This one is interesting. WeWork, as we all know, is the most famous, I think, S1 that completely derailed their IPO. Then they came to market via SPAC. They restructured their debt in May. So they pushed about $1.6 billion in debt maturities. They pushed that out to 2027.

This one is interesting. They're doing a vote, a reverse stock split, but they've given us a range from 1 to 10 to as high as 1 to 40. So that does give us a lot of range. As a shareholder, you don't get to vote on that. You get to vote for or against the split. The board gets to decide how big the split. So it's in an interesting spot. The CEO and the CFO recently left as well. So let's say not more people are going to the office. That seems to be a macro win that's hurting WeWork. But is there anything that could turn them around, you think? One of the things that I've thought a lot about with this is, is it the right idea? It seemed like such a brilliant idea. And yet, WeWork's not the only one that has had a problem with

making co-working profitable. After the early success of WeWork, a couple of the big real estate companies, including CBRE, they started their own WeWork kind of thing. CBRE had one called Hanna. They transferred that to Industrious, which is another co-working company. It's interesting. I feel like there's demand. There's a good brand here. But I think the split is buying them time. I'm wondering how big it could be. And I think that the idea was bigger than the actual reality is. One of the things I'm looking at is IWS Regus, right? Regus. That's the OG in the space. They've struggled on and off. They currently have around 3,300 spaces. I think that part of the problem with WeWork was that they projected a demand that was really much bigger

than it actually turned out to be. Well, and I was actually looking at the IWG earlier today, the one that owns Regus. And while actually, surprisingly, their revenue has gone up post-pandemic, that surprised me, they seem to be having a huge problem with net income profitability. And I think a lot of that's because of debt restructuring and you're paying much higher interest rates on those loans. Yeah, absolutely. It is not a great time to be dealing with trying to get loans for office space. While WeWork has a supply problem, there might be a demand problem for some of the vacation rental SPAC darlings, including Vacasa and Sonder. Yeah. Vacasa has been an interesting one to watch.

It's essentially a property management service for vacation rentals. That makes a lot of sense. We've seen how big Airbnb has gotten. Vacasa basically handles the property management for homeowners should be a great thing. But it has floundered a bit. The shareholders did recently approve a reverse stock split. So, the delisting problem is solved for now. But they've got some big problems, including homeowner churn. There's the demand, but I think that there's an issue of trying to right-size here. Because you've got a new CEO in place, Rob Graybar. They've done two rounds of layoffs. They're trying to streamline their tech. But I think part of the problem is really having the right supply of cleaning staff based on the turnover. So, you've got

two levels of supply and demand going on there. Also, never good to see a CFO transition when your company's in turmoil like that. One of the most high-profile delisting cases going on right now is Nikola, the electric truck maker, which is actually producing electric trucks. There's a lot of controversy and battle going around with the stock split at Nikola because the company right now is trying to issue more shares in order to fund existing operations. Seems to be bleeding a lot of cash right now, where I think their net income for the previous 12 months was about negative $800 million. They have about $400 million in cash. And you have a founder who is awaiting sentencing for securities fraud in Trevor Milton, who is saying,

you absolutely should not dilute any of the shareholders for this company. Right. This one is so complicated. They've been doing some of the delisting playbooks. So they've done layoffs, about 20% of the staff. They sold off a joint venture to one of their partners in Germany. They've taken their operations. They're consolidating it all in Coolidge, Arizona. They say that they can save $400 million by 2024. So that's good. But they're trying to straddle both the electric side and the hydrogen side, which I think is really complicated. And yeah, the Trevor Milton thing adds just this extra level of noise on top of everything else that they're trying to do. Well, not just noise. I think he still

has 50 million shares in the company. So he has a significant vote. And you have the poor CEO who has a video out on Vimeo appealing to the shareholders on Robinhood, please, in order to keep this company going, we need you to let us issue more shares and dilute you for a little bit. we couldn't even find how many new shares they wanted to issue. But this is a company like many of the ones we just described that is just struggling for oxygen right now, in addition to those delisting problems. Well, yeah. And the delisting thing is important because once you get delisted, I mean, it is a black market. It's very, very hard to come back from that. So you've got, really, he has to convince people. And Trevor Milton is out there saying, don't do this. This

is a terrible thing for you to do as a shareholder. So that's complicated as well. He can't change, even if he throws in all of his votes, he can't fully do it himself. So he sort of needs to convince them. So you've got both of these sides going on at the same time. Interesting to see how all of these play out. Deidre Woollick, appreciate it. Thank you. as always people on the program may have interest in the stocks they talk about and the motley fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear i'm deidre willard thanks for listening we'll see you tomorrow