Chinese internet giant Alibaba on Thursday called off plans to spin off its cloud services business, citing U.S. restrictions on chip exports. BABA stock tumbled on the news, which overshadowed an earnings report that topped estimates.
Alibaba disclosed the decision in its quarterly earnings report early Thursday. The company said the "recent expansion of U.S. restrictions on export of advanced computing chips" had created uncertainty.
"We believe that a full spinoff of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement," Alibaba said in a statement. "Accordingly, we have decided to not proceed with a full spinoff, and instead we will focus on developing a sustainable growth model for Cloud Intelligence Group under the fluid circumstances."
Alibaba first announced the spinoff in March as part of a broader reorganization of the company. BABA stock jumped when the plan was announced. Separately, a spinoff of Alibaba's Freshippo grocery business is also "on hold as we evaluate market conditions," the company said.
On the stock market today, BABA stock fell 9.1% to 79.11.
BABA Stock: Earnings Top Estimates
Meanwhile, Alibaba's earnings came in better than expected.
For its fiscal second-quarter ended Sept. 30, Alibaba reported adjusted earnings of $2.16 per share on sales of $31 billion. BABA stock analysts expected Alibaba to post adjusted earnings of $2.10 per share on sales of $31 billion, according to FactSet.
A year earlier, Alibaba reported adjusted earnings of $1.81 per share and sales of $29 billion. Further, revenue increased 9% year over year in local currency.
"Alibaba Group delivered a solid quarter, marked by renewed momentum and energy across multiple businesses as a result of our strategic reorganization," Alibaba Chief Executive Eddie Wu said in the news release.
Total revenue from the company's Taobao and Tmall online marketplace climbed 4% year over year in local currency, totaling $13.4 billion.
Chip Restrictions Hit Cloud Business
Sales for the cloud-focused division grew 2% year over year in local currency, totaling $3.8 billion for the quarter. Sales grew 4% year over year in the company's fiscal first quarter.
Alibaba is the cloud market leader in China and the third largest provider of public cloud services in the world behind Amazon and Microsoft, according to Gartner.
On the company's earnings call, Wu sounded an optimistic tone about the business, saying the "AI boom" is driving demand for computing power. He also said the cloud division "will resolutely implement a strategy of driving growth with AI and of prioritizing public cloud. It will scale up its technology investments in AI-related software and hardware."
But U.S.-China relations could make those investments more challenging. In October, the Biden administration announced tighter restrictions on the export of artificial intelligence chips and manufacturing equipment to China.
Beyond nixing the spinoff plan, Alibaba warned in its earnings release that the restrictions "may materially and adversely affect Cloud Intelligence Group's ability to offer products and services and to perform under existing contracts."
Dividend Plan
Meanwhile, Alibaba announced that its board approved a $2.5 billion cash dividend. The dividend is worth $1 per American depository share and will be payable in U.S. dollars to shareholders as of the close of trading on Dec. 21.
CFRA analyst Angelo Zino maintained a hold rating on BABA stock. But Zino trimmed the research firm's one-year price target for U.S.-listed Alibaba shares to 87, from 105.
"We find performance from the cloud segment to be extremely disappointing," Zino wrote. The recent chip restrictions create "uncertainty about the trajectory of BABA's AI prospects, which will prevent a spinoff of the business unit," he added.
Zino said the dividend news is "a mild positive," but he said the "geopolitical/regulatory uncertainty" remains a major headwind. "That said, valuation is discounting many of these issues and we note net cash stands at about 30% of BABA's market cap," he wrote.
BABA Stock: Technical Ratings
Prior to its earnings release, BABA stock on Wednesday had climbed above its 50-day line with a 5% gain. Shares were boosted by an earnings beat from competitor JD.com and positive consumer spending news in China.
But U.S.-listed BABA stock has struggled this year in response to concerns about the Chinese economy and relations between the U.S. and China. Including Thursday's slide, BABA stock is down 10% this year. Further, shares are discounted by nearly 75% from a high point reached in October 2020.
Moreover, Alibaba stock has an IBD Composite Rating of 72 out of 99, according to IBD Stock Checkup. IBD's Composite Rating combines fundamental and technical metrics for an overview of a stock's strengths. The best-rated growth stocks have a Composite Rating of 90 or better.
Further, Alibaba shares have a Relative Strength rating of 46 out of a best possible 99. The score indicates BABA stock is outperforming just 45% of stocks over the past 52 weeks.
On the other hand, Alibaba has an EPS Rating of 93 out of a best-possible 99. That highlights the company's earnings growth despite the lackluster share performance.
