Alibaba stock is falling after the group canceled a highly anticipated spinoff central to its value proposition to investors, underscoring how US-China tensions pose persistent risks to the Chinese technology sector.
Alibaba (ticker: BABA), citing risks to business from recently expanded U.S. export controls on advanced computer chips, said it would not proceed with closing its cloud computing arm — which also includes its efforts in artificial intelligence. Are included.
Alibaba, a Chinese tech company whose businesses span from online retail to AI, said in March it would divest itself and list its various divisions to realize value for shareholders after years of poor performance. .
The cloud arm has been central to Alibaba’s growth ambitions and restructuring blueprint, with investors expecting a spinoff to achieve a higher valuation as a result of its growth. But fresh US export regulations have hurt the outlook for the business and derailed the spinoff, destroying a pillar of the bullish case for the stock.
Alibaba also said it had put plans to list its grocery business, Freshippo, “as we evaluate market conditions and other factors that will contribute to a successful transaction to enhance shareholder value.”
Advertisement – Scroll to continue
China’s economic slowdown this year has hit the country’s capital markets, further complicating Alibaba’s goal of listing its subsidiaries. The company has so far only applied for an initial public offering for its Cainyao Logistics business, which will be listed in Hong Kong.
Alibaba shares fell more than 9% in Thursday trading, putting the stock on track for its worst day in more than a year.
Alibaba’s market value has fallen more than 70% since its peak in late 2020, largely as a result of regulatory pressures from Beijing — as it tried to rein in the power of the country’s tech giants — and Washington, D.C.
Advertisement – Scroll to continue
China’s big tech companies have become the focus of bilateral tensions, with the US in October expanding rules on exports of high-tech chips to China to control the country’s access to advanced technology such as AI.
Even as President Joe Biden and Xi Jinping met in San Francisco on Wednesday in an effort to improve US-China relations, there were few signs of progress on the economic front. Alibaba’s details of the woes to its cloud arm are reminiscent of the ongoing, unpredictable and uncontrolled risks that U.S.-China relations pose to widely held Chinese stocks such as JD.com (JD), Baidu (BIDU), Stands for Nio (NIO). and XPeng (XPEV).
“These new restrictions could have a material and adverse impact on Cloud Intelligence Group’s ability to offer products and services and perform under existing contracts,” Alibaba said in a statement accompanying the release of its September quarter earnings. “There will be a negative impact on results and financial position.” The group said the sanctions could further impact its business by hindering its ability to upgrade technological capabilities.
Advertisement – Scroll to continue
The uncertainties created for the cloud and AI business mean that “a full spin-off…may not achieve the desired impact of shareholder value accretion,” the company said. “Instead we will focus on developing a sustainable growth model for Cloud Intelligence Group in volatile circumstances.”
The news from Alibaba has dampened investor mood, otherwise they might have celebrated a strong September quarter. Alibaba reported earnings of 15.63 Chinese yuan ($2.16) a share on revenue of 224.8 billion yuan ($31 billion) for the three months to the end of September. Analysts surveyed by FactSet had expected earnings of 15.28 yuan a share on revenue of 224.5 billion yuan.
“Although Alibaba disappointed investors with its announcement of the aborted cloud spinoff, it is important to note that revenue was up 9% and earnings per share were up 21% year-over-year,” the chairman of Thomas Hayes says. Hedge fund Great Hill Capital, which owns Alibaba.
But, Hayes explained, “the market doesn’t like surprises.”
Write to Jack Denton at [email protected]
Source: www.barrons.com
