stock was on track for a second day of losses, after the Chinese tech giant revealed Thursday that new U.S. export restrictions on chips are hurting its cloud computing business so much that it canceled plans to spin off the division.
(ticker: BABA) were down 2.6% in Friday trading, extending the pain after the stock tumbled 9.1% on Thursday, its worst daily performance in more than a year.
Alibaba’s better-than-expected quarterly results released Thursday were completely overshadowed by shock news that it had canceled the hotly-anticipated spinoff of its cloud computing division, which also includes its efforts in artificial intelligence (AI).
An expansion of U.S. chip export controls in October—a bid by the White House to limit China’s access to critical technology, like AI—“may materially and adversely affect Cloud Intelligence Group’s ability to offer products and services and to perform under existing contracts, thereby negatively affecting our results of operations and financial condition,” Alibaba said. The spinoff of the cloud arm to shareholders has been shelved as a result of the division’s clouded prospects, the company added.
This is bad news for Alibaba stock for two reasons. One, the group has revealed that its most exciting and growth-oriented division faces an uncontrollable material impact. Two, the cloud spinoff was at the heart of Alibaba’s ambitious plan announced earlier this year to restructure itself from conglomerate to holding company in a bid to unlock value for shareholders. No more.
Wall Street hasn’t blinked, with analysts rushing to cut their price targets on Alibaba shares, even though many maintained their Buy ratings on a stock that has suffered from three years of underperformance, largely as a result of regulatory issues.
“We believe the stock sold off ~10% given exit of sum-of-the-parts investors and the focus returns to China’s macro recovery. We consider Alibaba an attractive turnaround story,” said
analyst James Lee. Sum-of-the-parts investors refers to those who may have bought Alibaba stock after the spinoff was revealed—a trade resting on the prospect that the shares would shed their conglomerate discount if the cloud division received a higher valuation on its own.
Lee’s team at Mizuho lowered their price target on Alibaba from $120 to $87.07. The stock closed at $79.11 on Thursday.
“No further pursuit on 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 a structural fundamental change.” Benchmark maintained its Buy rating with a $150 price target—still a bullish call.
Other analysts have mostly followed suit in trimming their expectations, with 22 analysts surveyed by FactSet lowering their target prices on Alibaba stock following Thursday’s news.
Write to Jack Denton at [email protected]