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Why Alibaba Is Buying Back Shares Worth $500 Million

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Repurchase of $500 million in shares

In its recent earnings, Alibaba (BABA) mentioned that it is highly reliant on China despite its aspirations to broaden its exposure overseas. Chair Jack Ma expressed his desire to get half of the company’s sales from abroad. In the recent quarter, the revenues generated from abroad increased to 12% YoY (year-over-year) from 5% YoY in the previous quarter. The company’s current price is hovering around its IPO (initial public offering) price of $68 after seeing a huge impact from China’s (FXI) economic downturn.

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Jack Ma and vice chair Joseph Tsai have decided to buy shares worth $500 million from their private funds. According to the company, the primary reason for the share buyback program is to offset the impact of share-based compensation programs. The move will also increase the value per share. However, the impact will be marginal as the number of shares repurchased will be around seven million (as per the current price) out of 2.6 billion diluted shares, according to what the company announced in the recent quarter. On one hand, the company is reducing its equity, and on the other hand, the company is planning to increase its debt.

Borrowing $4 billion

Alibaba is reaching out to invest in both the China and overseas market. The company is planning to borrow $4 billion to fund its expansion and acquisition plans. Alibaba has made several investments in different segments. For instance, the company purchased a 4% stake in Korea’s (EWY) SM Entertainment, which is a popular Korean music group. Apart from this, the company also invested in online retailers Jet.com, augmented-reality provider Magic Leap, ride-hailing service Lyft, and bought a 20% stake in electronics retailer Suning Commerce Group, according to the Wall Street Journal.

Amazon (AMZN) and Google (GOOG) constitute 9.1% and 8.7% of the PowerShares NASDAQ Internet Portfolio (PNQI), respectively.

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