Alibaba Scraps Cloud Intelligence Group Spinoff Amid Increased U.S. Restrictions on Chip Exports

Alibaba cancels plans to spin off Cloud Intelligence Group due to expanded U.S. chip export restrictions.

The Chinese internet giant Alibaba has chosen to abandon its plans for a spinoff of its cloud services arm, Cloud Intelligence Group. The decision was attributed to the recent escalation of U.S. restrictions on advanced computing chip exports and came to light in the company’s latest quarterly earnings report. This unexpected move overshadowed Alibaba’s positive earnings report, leading to a significant downturn in Alibaba stock.

Concerns Arise Over U.S. Chip Export Restrictions

When the initial announcement of the spinoff came in March as part of a broader corporate restructuring initiative, it had driven a surge in Alibaba stock. However, Alibaba now cites heightened uncertainty resulting from increased U.S. restrictions on advanced computing chips as the primary reason for reconsidering the spinoff.

The company stated that it had reservations about achieving the intended enhancement of shareholder value through a full spinoff. So, they opted instead to concentrate on devising a sustainable growth model for Cloud Intelligence Group within the current dynamic circumstances.

Earnings Surpass Expectations Despite the Setback

Although the decision to abandon the spinoff led to a 9.1% drop in Alibaba stock to $79.11, Alibaba’s quarterly earnings outperformed expectations. For the fiscal second quarter concluding on September 30, the company reported adjusted earnings of $2.16 per share on sales totaling $31 billion. Analysts had anticipated adjusted earnings of $2.10 per share on sales of $31 billion. Despite the positive earnings report, the spinoff decision took center stage.

Impact on Cloud Business and Market Conditions Assessment

Alibaba’s cloud-focused division saw a 2% year-over-year growth in sales, amounting to $3.8 billion for the quarter. Despite holding the position of cloud market leader in China and ranking as the third-largest global provider of public cloud services, Alibaba acknowledges that challenges may arise due to U.S.-China relations and chip export restrictions impacting the growth of its cloud business. Despite potential obstacles, the company remains committed to implementing a growth strategy centered on artificial intelligence (AI) and the public cloud.

Dividend Declaration Amid Regulatory Uncertainty

In the face of the setback, Alibaba’s board approved a $2.5 billion cash dividend valued at $1 per American depository share. As trading closes on December 21, shareholders will receive the dividends in U.S. dollars. Analysts maintained a hold rating on Alibaba’s stock but at the same time expressed concerns about geopolitical and regulatory uncertainties as substantial headwinds.

Technical Ratings and Market Performance

Alibaba stock, which had previously exhibited a 5% gain and surpassed its 50-day line before the earnings release, faced challenges this year due to concerns about the Chinese economy and U.S.-China relations. As of Thursday’s decline, Alibaba stock has recorded a 10% decrease for the year, with shares now trading at nearly a 75% discount from their peak in October 2020.

Alibaba stock currently boasts an IBD Composite Rating of 72 out of 99, reflecting a combination of fundamental and technical metrics. The Relative Strength rating is 46 out of 99, indicating out performance compared to only 45% of stocks over the past 52 weeks. Despite recent share performance challenges, the EPS Rating remains at a robust 93 out of 99, underscoring the company’s impressive earnings growth.