Company News
Nov 17, 2023

Alibaba's Abrupt Decision to Halt Cloud Unit Spin-Off Erases $20 Billion from Shares

Alibaba's unexpected announcement to abandon its cloud business spin-off triggered a drastic downturn in its share value, effectively erasing $20 billion from its market capitalization.

The startling strategy reversal, prompted by US restrictions on exporting advanced artificial intelligence (AI) chips to China, sent shockwaves across Asian markets. Investors reacted with concern, questioning potential undisclosed issues behind the scenes, as noted by Jietang Zhao, Chief of Accounts at Vantage Asset Management in Hong Kong.

The repercussions were immediate, with Alibaba's Hong Kong-listed shares plummeting nearly 10% on Friday, marking a potential record-breaking one-day decline in over a year. This decline followed a 9% freefall in Alibaba's US-listed shares on Thursday, with an additional 4% drop in pre-market trade on the NYSE the following day.

Once the most valuable stock in Asia, Alibaba's market cap peaked at around $830 billion in October 2020. However, it has since dwindled to less than a quarter of that figure, primarily due to its involvement in Beijing's crackdown on the technology sector, catalyzed by co-founder Jack Ma's contentious speech in November 2020.

Furthermore, news of Jack Ma's family trust planning to sell 10 million American Depository Shares in Alibaba has further dented investor sentiment, according to UBS analyst Kenneth Fong.

In response to the setback, Alibaba's chairman, Joseph Tsai, emphasized a renewed focus on developing the cloud business and investing in AI initiatives during a post-earnings call. Analysts suggest that retaining the cloud unit could fortify Alibaba's position in the burgeoning AI landscape, especially considering the escalating demand for AI computing in China.

Despite uncertainties, Alibaba reported second-quarter revenue in line with analyst expectations. CEO Eddie Wu outlined the company's future strategy, emphasizing a more independent market approach for each business unit and a strategic review to discern between "core" and "non-core" operations.

Alibaba's move reflects broader challenges confronting China's tech sector, exacerbated by Washington's export restrictions on crucial chip supplies. This announcement comes on the heels of Tencent Holdings' declaration of seeking domestic alternatives to US chipmaker Nvidia, citing risks to its cloud services from US AI chip bans.

Alibaba's decision to halt the cloud unit spin-off underscores the complexities of navigating regulatory scrutiny and market volatility in the tech industry. While the company continues to pursue its listing plans for Cainiao and external fundraising for its international digital commerce unit, uncertainties loom over the future trajectory of China's tech giants amidst geopolitical tensions and regulatory pressures.