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Alibaba’s U-turn on cloud unit spin-off lops $20 billion off its market value

Photo: Alibaba
Photo: Alibaba

Alibaba’s U-turn on cloud unit spin-off lops $20 billion off its market value. The market capitalization of Alibaba Group (9988. H.K.) dropped by almost $20 billion on Friday due to its decision to abandon plans to spin off its cloud business. The company cited uncertainty regarding the extent to which the United States would restrict shipments to China of chips used in artificial intelligence applications as the reason for its decision.

The Alibaba Group’s Hong Kong shares had their most significant single-day decline in over a year when they finished down 10%.

It was the first market reaction in Asia after the surprise strategic reversal was unveiled late on Thursday. Following the announcement, the company’s U.S.-listed stocks dropped by 9% by the end of trading.

“The shelving is a surprise, and it makes us wonder if there are issues behind the scenes that we aren’t aware of,” said Jon Withaar, the Singapore-based director of Asia Exceptional Circumstances at Pictet Asset Management. “The shelving makes us wonder if there are issues behind the scenes that we aren’t aware of.”

Concerns highlighted by Alibaba about the U.S. export curbs announced by Washington in October came on the heels of similar concerns raised this week by Chinese social media and gaming firm Tencent Holdings (0700. H.K.). Tencent Holdings stated that the restrictions would require looking for alternatives manufactured locally in China. Alibaba’s concerns follow in the footsteps of Tencent Holdings’ statements.

Alibaba, formerly the most valuable stock in Asia, peaked in October 2020 at a valuation of over $830 billion but is now valued at less than a fourth of that amount. This is because businesses took center stage in Beijing’s crackdown on the technology industry and the Chinese economy.

Alibaba directed Reuters’ attention to comments its chairman Joseph Tsai made during an earnings conference on Thursday about how the firm planned to invest in its cloud business when they were asked if there were any other reasons for delaying the initial public offering (IPO).

The most recent news regarding Alibaba highlights the more significant challenges that China’s technology companies are facing. The export controls are making it more difficult for these companies to obtain vital chip supplies from American businesses.

In March, Alibaba made public its intentions to spin off its cloud computing division as a part of the most significant corporate reorganization in its 24-year history, establishing six distinct business divisions.

Analysts had estimated the cloud division’s value to be between $41 and $60 billion. Still, they had cautioned that its listing might attract scrutiny from Chinese and foreign regulators due to the vast amounts of data it maintains.

In addition to disclosing its quarterly profits on Thursday, the Hangzhou-based company placed a listing proposal for its Freshippo grocery business on hold.

Analysts predicted that the news that Jack Ma, a co-founder of Alibaba and a former chief executive, intended to sell 10 million American Depository Shares in Alibaba could impact the business’s stock price.

“Despite no longer being involved in operations, we believe that Ma’s selling Alibaba at a depressed valuation may hurt sentiment,” a UBS analyst named Kenneth Fong said in a note earlier this week.

CENTER ON AI
During a call after the release of Alibaba’s quarterly earnings on Thursday, Chairman Joseph Tsai stated that the firm will now concentrate on expanding its cloud business and providing funding for its artificial intelligence (AI) drivers.

According to some experts, keeping the cloud business might help Alibaba advance in the artificial intelligence space.

The firm believes the chip prohibition will significantly and negatively impact products and services in the long run. “But it also points to the increasing importance of retaining the cloud unit given the surging demand for A.I. computing in China,” said U.S. Tiger Research analyst Bo Pei. “It also points to the increasing importance of retaining the cloud unit.”

According to LSEG statistics, experts predicted that Alibaba would post sales of 224.32 billion yuan for the second quarter, but the company recorded revenue of 224.79 billion yuan ($31.01 billion).

On the call, Eddie Wu, the Chief Executive Officer of Alibaba, provided a comprehensive overview of the firm’s plans. He stated that each of Alibaba’s companies would approach the market more autonomously and that the company would carry out a strategic assessment to differentiate between “core” and “non-core” operations.

Some observers have stated that they have a favorable impression of Wu’s approach and that it is reasonable to anticipate that he would reevaluate the choices taken by his immediate predecessor, Daniel Zhang, who unexpectedly resigned in September, barely two months after emphasizing cloud computing.

According to an analyst at Union Bancaire Privée named Vey-Sern Ling, “Giving away the cloud business clearly isn’t the best way to enhance shareholder value any more, given depressed market valuations and the fact that the share price has barely moved since the announcement.”

Additionally, the business stated that it intends to move on with a listing of Alibaba’s logistics subsidiary, Cainiao, which applied to an initial public offering in Hong Kong in September.

In addition, it is getting ready to seek outside funding for its international digital commerce subsidiary, which is home to several overseas platforms, including Lazada and Alibaba.com.

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