Alibaba
stock is dropping after the group canceled a hotly anticipated spinoff at the heart of its value proposition to investors, underscoring how U.S.-China tensions pose a persistent risk to the Chinese technology sector.
Alibaba (ticker: BABA) said it won’t proceed with spinning off its cloud computing arm—which also houses its efforts in artificial intelligence—citing risks to the business from recently-expanded U.S. export controls on advanced computer chips.
A Chinese tech company whose business stretches from online retail to AI, Alibaba said in March that it would split itself up and list its various divisions in a bid to realize value for shareholders after years of underperformance. The cloud arm has been at the heart of Alibaba’s growth ambitions and restructuring blueprint, with investors hoping that a spinoff would achieve a higher valuation as a result of its growth. But fresh U.S. export rules both damage the outlook for the business and have derailed the spinoff, destroying a pillar of the bull case for the stock.
Shares in Alibaba were down 8% in Thursday trading.
Alibaba’s market value has fallen by more than 70% since its peak in late 2020, largely as a result of regulatory pressures both from Beijing—as it sought to rein in the power of the country’s tech behemoths—and Washington, D.C. China’s big tech companies have become a flashpoint of bilateral tensions, with the U.S. in October expanding rules over the export of high-tech chips to China in a bid to control the country’s access to advanced technology like AI.
Even as Presidents Joe Biden and Xi Jinping met in San Francisco on Wednesday in an effort to thaw U.S.-China relations, there have been few signs of progress on the economic front. Alibaba detailing woes for its cloud arm is a reminder of the ongoing, unpredictable, and uncontrollable risks that U.S.-China relations pose to widely held Chinese stocks, such as
JD.com
(JD),
Baidu
(BIDU),
Nio
(NIO), and
XPeng
(XPEV).
“These new restrictions may materially and adversely affect Cloud Intelligence Group’s ability to offer products and services and to perform under existing contracts, thereby negatively affecting our results of operations and financial condition,” Alibaba said in a statement accompanying its September quarter earnings release. The group added that the restrictions may more generally impact its business by hindering the ability to upgrade technological capabilities.
The uncertainties created for the cloud and AI business mean that “a full spin-off … may not achieve the intended effect of shareholder value enhancement,” the company said. “Instead we will focus on developing a sustainable growth model for Cloud Intelligence Group under the fluid circumstances.”
Alibaba’s news sours the mood for investors, who otherwise 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 ($31 billion) for the three months to the end of September. Analysts surveyed by FactSet had expected earnings at 15.28 yuan a share on revenue of 224.5 billion yuan.
“While Alibaba disappointed investors with its announcement to scuttle the cloud spinoff, it is critical to keep in mind that revenues were up 9% and earnings-per-share was up 21% year-over-year,” says Thomas Hayes, chairman of hedge fund Great Hill Capital, which holds Alibaba.
But, Hayes explained, “The market does not like surprises.”
Write to Jack Denton at jack.denton@barrons.com
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