Alibaba shares were on track for a second day of losses after the Chinese tech giant said Thursday that new U.S. chip export restrictions were hurting its cloud computing business so much that it abandoned plans to spin off the division.
Shares of Alibaba (ticker: BABA) fell 2.6% in Friday trading, adding to the pain after the stock plunged 9.1% on Thursday, its worst daily performance in more than a year.
Alibaba’s better-than-expected quarterly results released on Thursday were completely overshadowed by the shocking news that the company had canceled the much-anticipated spinoff of its cloud computing division, which includes its artificial intelligence (AI) efforts.
An expansion of U.S. chip export controls in October — an attempt by the White House to limit China’s access to critical technologies such as AI — “could thereby have a significant and adverse impact on Cloud Intelligence Group’s ability to provide products and services and within existing frameworks.” “This has an adverse impact on our operating results and financial condition,” Alibaba said. The company added that the spin-off of the cloud division to shareholders has been put on hold due to the division’s weakened prospects.
This is bad news for Alibaba stock for two reasons. First, the group has revealed that its most exciting and growth-oriented business area is facing uncontrollable material consequences. Second, the cloud spinoff was at the heart of Alibaba’s ambitious plan, announced earlier this year, to restructure itself from a conglomerate into a holding company to create value for shareholders. No longer.
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Wall Street didn’t bat an eyelid, and analysts rushed to lower their price targets on Alibaba shares, although many maintained their buy rating on a stock that has suffered from underperformance for three years, largely due to regulatory issues.
“We believe the stock has sold off by around 10% due to investors exiting all things considered and the focus is returning to China’s macroeconomic recovery. We think Alibaba is an attractive turnaround,” said Mizuho analyst James Lee. Sum-of-the-parts investors refer to those who may have bought Alibaba shares after the spinoff was announced – a deal based on the prospect that the shares would lose their conglomerate discount if the cloud division alone would receive a higher rating.
Lee’s team at Mizuho lowered its price target on Alibaba from $120 to $87.07. The stock closed at $79.11 on Thursday.
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“The company’s failure to pursue its cloud spinoff was a setback to its capital management plan,” said Fawne Jiang, an analyst at Benchmark. “It was undoubtedly a disappointing quarter; However, we do not see any structural fundamental change.” Benchmark maintained its Buy rating with a price target of $150 – still a bullish forecast.
Other analysts have mostly followed suit and lowered their expectations: 22 analysts surveyed by FactSet lowered their price targets on Alibaba shares following Thursday’s news.
Write to Jack Denton at [email protected]