Alibaba Group, the Chinese e-commerce giant, experienced a massive $20 billion loss in market value as its spin-off plan for its cloud business failed. This sudden market reaction took place in Asia following the company’s announcement that it would be scrapping its plans due to uncertainties surrounding U.S. restrictions on exporting chips used in artificial intelligence applications to China.
Alibaba’s Hong Kong shares saw a significant drop of 10%, marking their largest single-day decline in over a year. This came after the company’s U.S.-listed securities closed down 9% the previous day. The unexpected shelving of the spin-off plan left experts questioning whether there were undisclosed issues behind the scenes.
The concerns raised by Alibaba regarding U.S. export curbs, which were announced by Washington in October, mirrored similar worries expressed by Tencent Holdings, a Chinese social media and gaming company. Both companies highlighted how these restrictions would force them to seek domestically produced alternatives.
Alibaba, once the most valuable stock in Asia, reached a peak value of around $830 billion in October 2020. However, its current valuation is now less than a quarter of that at around $200 billion. This decline in value is a result of multiple factors, including Alibaba’s involvement in Beijing’s crackdown on the technology sector and the overall slowdown of the Chinese economy.
The decision to shelve the IPO raised questions about potential reasons behind the move. When asked about this, Alibaba referred to Chairperson Joseph Tsai’s remarks made during an earnings call, where he discussed the company’s plans to invest in its cloud business.
This recent development highlights the challenges faced by China’s tech companies as they encounter difficulties in obtaining essential chip supplies from U.S. companies due to the export curbs. In March, Alibaba had initially announced its plans to carve out the cloud business as part of a major restructuring effort. Analysts had estimated that the cloud division could be valued between $41 billion and $60 billion. However, they had also cautioned that the listing could attract scrutiny from regulators due to the immense volume of data it manages.
In addition to shelving the IPO for its cloud business, Alibaba also put a hold on a listing plan for its Freshippo groceries business. Furthermore, news of the family trust of Alibaba co-founder Jack Ma planning to sell 10 million American Depository Shares likely impacted the company’s shares.
Chairperson Joseph Tsai mentioned during a post-earnings call that Alibaba will now focus on expanding its cloud business and providing investment for its artificial intelligence initiatives. Analysts believe that keeping the cloud unit could support Alibaba’s push in the field of AI, as the ban on chips could adversely affect the company’s ability to offer AI products and services.
In terms of financial performance, Alibaba reported second-quarter revenue of 224.79 billion yuan ($31.01 billion), which is in line with analysts’ expectations. Eddie Wu, the chief executive of Alibaba, shared the company’s future strategy during the call, emphasizing that each business unit would operate more independently. They also plan to conduct a strategic review to determine core and non-core businesses.
Some analysts view this strategy positively and believe that it is reasonable for Wu to reassess decisions made by his predecessor, Daniel Zhang, who resigned abruptly in September after focusing heavily on cloud computing. Union Bancaire Privée analyst Vey-Sern Ling suggests that giving away the cloud business would not enhance shareholder value considering the current market valuations.
Alibaba also confirmed that it will move forward with the listing of Cainiao, its logistics arm, which applied for a Hong Kong initial public offering in September. The company is also preparing for external fundraising for its international digital commerce unit, encompassing platforms such as Lazada and Alibaba.com.
This latest development reflects the challenges faced by Alibaba and other Chinese tech giants in navigating the complexities of the global market. As the industry continues to evolve, companies need to adapt to changing regulations and investor expectations while strategically positioning themselves for future growth.