Alibaba Scraps Cloud Unit Spinoff, Shares Plunge

Shares of Alibaba Group Holding Ltd. tumbled in premarket trading in New York after it abandoned plans to spin off its cloud computing unit, blaming the Biden administration’s expansion of advanced semiconductor export restrictions on Chinese companies. 

In a Thursday earnings release, China’s e-commerce giant said its Cloud Intelligence Group – the cloud computing arm of Alibaba that competes with Microsoft Azure and Amazon WebServices – said, “expansion of US restrictions on export of advanced computing chips has created uncertainties for the prospects of Cloud Intelligence Group.” 

Alibaba continued, “We believe that a full spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement. Accordingly, we have decided to not proceed with a full spin-off, and instead we will focus on developing a sustainable growth model for Cloud Intelligence Group under the fluid circumstances.”

The news sent Alibaba’s shares in New York down 8% in premarket. Shares are flat on the year and have been range-bound since the start of 2022. They are still down 73% since peaking in October 2020 (around the time when Beijing began to overhaul its tech sector). 

The decision to halt spin-off plans is a significant setback in Alibaba’s restructuring strategy into six separate business divisions, which would have been one of the most radical shake-ups in the company’s history. 

“That maneuver was designed to grant more autonomy to the separate businesses, hopefully rejuvenate them, and create value on markets. Such a split, however, will likely reduce Alibaba’s heft and erode its position as one of the leaders of the Chinese digital economy,” Bloomberg said. 

Willer Chen, research analyst at Forsyth Barr Asia, said the news today “should be a big surprise to the market. This is a big contrast to the previous clear spinoff timetable.” 

“Even considering relative weak market situation, the suspension still leaves the market scratching its head. The first annual dividend looks like a compensation to shareholders. However, it may not fully offset the shock given the higher value of cloud unit,” Chen said. 

On Wednesday, Chinese technology giant Tencent Holdings warned even though it has a large stockpile of AI chips from Nvidia, expanding US export controls on high-end chips could soon impact its cloud services.  

“We feel that the chip ban does actually affect our ability to resell these AI chips through our cloud services, and that’s one area that may be impacted,” Tencent President Martin Lau said.

As the Biden administration’s chip restrictions spark turmoil for Chinese tech companies, Biden went full off the script on Wednesday at the Asia-Pacific Economic Cooperation summit in San Fran and called President Xi a “dictator” – So much for the attempt to rekindle Sino-US ties.