The Pros and Cons of Ryan Cohen’s Latest Activist Play

This morning's report from the Financial Times suggests that Ryan Cohen, the man who grew and sold Chewy (CHWY) for billions, has set his sights on a new target. 

Cohen, who took his fortune from his Chewy profits, and is attempting to revive firms such as GameStop (GME) to their former glory, is shining his activist schtick on Alibaba (BABA), the Chinese e-commerce giant whose shares have lost 36% of their value over the past five years.   

With meme stocks surging early in 2023, I’m sure plenty of do-it-yourselfers will contemplate following Cohen’s lead and buy some BABA stock.

While I don’t believe Cohen’s proven he’s a good investor, there’s no question he’s demonstrated that he’s got the chops to build and grow an online business. Whether that’s helpful to Alibaba remains to be seen. 

Here are the pros and cons of following Cohen’s lead.

Cohen Sees Repurchases as a Key Component

According to Financial Times reporting, Cohen’s been after Alibaba since the second half of 2022 to make some moves to deliver more value to its shareholders. He wants Alibaba to speed up its share repurchase program. 

In March 2022, Alibaba announced it would increase its share repurchase program to $25 billion, up from $15 billion. 

“The upsized share buyback underscores our confidence in Alibaba's long-term, sustainable growth potential and value creation,” Deputy Chief Financial Officer Toby Xu said according to Reuters reporting. 

“Alibaba's stock price does not fairly reflect the company's value given our robust financial health and expansion plans.”

As Reuters noted at the time, it made sense to up its share repurchases, given the company would require less cash for investments as it doubled down on e-commerce.

In November, the company upped it again to $40 billion. Cohen would like to see Alibaba increase it to $60 billion.

In September 2020, BABA stock hit an all-time high of $319.32. But, by October 2022, it hit a five-year low of $58.01. In 23 months, its shares lost 82% of their value. Yet, it still has a market cap of nearly $310 billion. 

While this isn’t the traditional type of company that Cohen’s gone after with his activism, pushing it to make accelerated share repurchases is low-hanging fruit. He’s asking management and the board to buy back 20% of its stock.

If Cohen were buying shares in October when it was at a five-year low, the potential gains from his activism could be much easier to secure than flailing around with the Bed Bath & Beyond (BBBY) and GameStop’s of the world.

As reported, Cohen believes the company can return to double-digit sales growth, which would, in turn, deliver 20% growth in free cash flow. 

The big question is whether Cohen can influence the Chinese company because, to date, it’s been more concerned about staying in the good graces of the Chinese government than reigniting growth.

Cohen’s Yet to Prove He’s Not a One-Hit Wonder

In the past six fiscal years since Chewy sold itself to Petsmart for $3.35 billion in May 2017 -- Petsmart’s private equity owners took Chewy public in June 2019, distributing its entire remaining stake to investors in October 2020 -- it has not made an annual profit despite revenues growing 570% to $9.78 billion in the 12 months ended Sept. 30, 2022. 

In fact, since Chewy’s founding in 2011, it has never made money. So we’re going on 12 years without a profit. As a result, its accumulated deficit at the end of Q3 2022 was nearly $2 billion.

That is the legacy upon which meme-stock investors have planted their flag in Cohen’s support. But, if anything, Cohen’s wisest move to date was selling Chewy to Petsmart in 2017, enabling him and his investors to take much of their profits off the table.

MarketWatch reported in March 2020 that Cohen rolled a big chunk of his proceeds from Chewy’s sale into Apple (AAPL) stock. At the time, he was said to own 1.55 million shares. I’ve been unable to find anything that confirms this amount. Assuming it’s for real, and he still holds the shares -- they split 4-for-1 in August 2020 -- his stake is worth about $851 million. 

Assuming he paid approximately $40 a share for his Apple stock in the summer of 2017, he made about $600 million on his Apple investment. So, he may be a good investor after all.

However, making a smart bet on Apple doesn’t make Cohen a great activist or a turnaround artist. 

Here’s what we know so far about his other high-profile bets.

In August 2022, in what some have characterized as a pump-and-dump scheme, Cohen made a $68 million profit by selling his entire stake in Bed Bath & Beyond. This after pretending to be interested in turning around the struggling retailer. 

As for his GameStop investment, the verdict remains very much in the air. Cohen’s RC Ventures owns nearly 12% of its stock, with Cohen serving as Chairman. GameStop shares have benefited in recent days from the meme-stock resurgence. 

However, the company’s Q3 2022 results demonstrated that Cohen and CEO Matt Furlong have a long way to go before declaring their turnaround efforts a resounding success. 

Like Chewy, GameStop is losing money -- $358.4 million adjusted net loss through nine months ended Oct. 29, 2022 -- unfortunately, if not for the $1.67 billion at-the-market stock sale gifted by meme-stock investors in June 2021, GameStop would have negative equity. 

Do you get the trend here? Cohen likes to be involved in money-losing operations. He’s yet to prove he knows how to run a profitable business.

The Bottom Line

The Wall Street Journal wrote a flattering piece about Cohen in November that paints the billionaire investor as a big supporter of individual investors.

“I admire the individual investors, and institutional Wall Street mocks them,” Shack News reported Cohen’s comments from the WSJ. “Frankly, it makes me sick.”

Of course, Cohen’s going to support the little guy. Without them, he’d have nothing good to report from all his activist adventures. 

I wonder why Cohen landed on Alibaba. Numerous American companies could use a little shake-up. But at least this time, he’s decided to bet on a company that’s solidly in the black. 

Long-term, Alibaba stock is a good buy. However, with Cohen involved, I’m not so sure.

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