Shock Reversal on Cloud Unit Wipes $20bn Off Alibaba Shares

Alibaba’s shock decision to scrap the planned spin-off of its cloud business sparked a sharp sell-off in its share price, effectively wiping $20 billion of its market value.

That was the first market reaction in Asia since Alibaba announced the stunning strategy reversal, which the technology giant said was brought on by US curbs on exports of advanced artificial intelligence (AI) chips to China.

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

Also on AF: Tencent to Turn to Chinese Chips as US Bans Risk Cloud Service

Investors seemed to echo that sentiment, with Hong Kong-listed shares of Alibaba plunging close to 10% on Friday. That was potentially its biggest one-day fall in more than a year.

The drop also followed a 9% plunge in Alibaba’s US-listed shares on Thursday. The company’s shares on NYSE were down another 4% in pre-market trade today.

Alibaba, once Asia’s most valuable stock, was worth around $830 billion at its peak in October 2020. It is now valued at less than a quarter of that amount after taking centre-stage in Beijing’s technology sector crackdown, following a controversial speech by co-founder Jack Ma in early November in that year.

Analysts also said that news on Thursday that the family trust of Ma, its former chief, planned to sell 10 million American Depository Shares in Alibaba was likely impacting shares.

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

Cloud unit ‘key’ amid AI boom

On Thursday, Alibaba chairman Joseph Tsai told a post-earnings call that the company would now focus on growing the cloud business and providing investment for its artificial intelligence (AI) drivers.

Some analysts said keeping the cloud unit could assist Alibaba’s AI push.

“The company believes the chip ban might materially and adversely affect its ability to offer products and services in the longer term. But (it) also points to the increasing importance of retaining the cloud unit given the surging demand for AI computing in China,” US Tiger Research analyst Bo Pei said.

Alibaba reported second-quarter revenue of 224.79 billion yuan ($31.01 billion), in line with the 224.32 billion expected by analysts, LSEG data showed.

Eddie Wu, chief executive of Alibaba, detailed the company’s future strategy on the call, saying that each of its businesses would face the market more independently and that they would conduct a strategic review to distinguish between “core” and “non-core” businesses.

Some analysts said they viewed Wu’s strategy positively and said it was to be expected that he would reassess decisions made by his predecessor, Daniel Zhang, who abruptly quit in September just two months after focusing on cloud computing.

“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,” analyst Vey-Sern Ling from Union Bancaire Privée said.

Larger headache for China tech businesses

Alibaba’s move underscores broader hurdles facing China’s tech firms, with Washington’s export curbs making it harder for them to get crucial chip and chipmaking supplies from companies not just in the US, but also the Netherlands and Japan.

The e-commerce giant’s announcement came just a day after another Chinese tech giant — Tencent Holdings — said it will seek domestic alternatives to US chipmaker Nvidia. The firm said US AI chip bans posed a risk to the future of its cloud services.

Alibaba had said in March that it planned to carve out the cloud business as part of a restructuring, the biggest in its 24-year history, that broke the company up into six units.

Analysts had estimated then the cloud division could be worth $41-$60 billion but had warned that its listing could attract scrutiny from both Chinese and overseas regulators due to the reams of data it manages.

The Hangzhou-based company, in announcing its quarterly earnings on Thursday, also put on hold a listing plan for its Freshippo groceries business.

The company also said it will press ahead with a listing of Alibaba’s logistics arm, Cainiao, which applied for a Hong Kong initial public offering in September.

It is also preparing for external fundraising for its international digital commerce unit that houses overseas platforms such as Lazada and Alibaba.com.

• Reuters, with additional editing by Vishakha Saxena

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