Alibaba’s cloud business U-turn triggers $20 billion market fallout

In a surprising turn of events, Chinese e-commerce juggernaut Alibaba Group Holding Ltd. has set off shockwaves in the financial world, losing more than $20 billion in market value, and further underscoring the intricate geopolitical landscape between the United States and China. The catalyst for this significant market shift? Alibaba’s decision to abandon its plans to spin off and list its cloud computing business, the Cloud Intelligence Group.

Alibaba's cloud business U-turn triggers $20 billion market fallout

The Cloud Intelligence Group, positioned as a fierce competitor to tech titans like Amazon Web ServicesMicrosoft Azure, and Google Cloud Platform, had initially garnered substantial attention. Analysts, as recently as March, had projected its valuation to range between $41 billion and $60 billion. However, these lofty expectations have taken a substantial hit due to Alibaba’s strategic reversal.

The primary reason cited by Alibaba for this strategic pivot is the prevailing U.S. export restrictions on advanced chips. These restrictions have introduced what the company terms “uncertainties” regarding the Cloud Intelligence Group’s future prospects. This about-face was made official in a company statement, where Alibaba CEO Joe Tsai emphasized their commitment to nurturing a sustainable growth model, centered around the burgeoning demand for AI-driven, networked, and highly scaled cloud computing services.

This abrupt decision, announced on Thursday, has sent shockwaves through the financial markets. At the close of the Hong Kong stock market on Thursday, Alibaba’s market capitalization stood at 1.65 trillion Hong Kong dollars ($211.6 billion). However, by the following day, the company’s market cap had plummeted to 1.49 trillion Hong Kong dollars, signaling a staggering loss of $21.1 billion, according to CNBC’s calculations based on FactSet data.

The repercussions of this setback reverberated in the U.S. as well, with U.S.-listed Alibaba shares suffering a 4% decline in premarket trading. This downturn compounds the 9% plunge witnessed during the preceding trading session, leaving investors disheartened. The reticence of Alibaba to proceed with the spinoff can be traced to the growing concerns about potential regulatory scrutiny, both domestically and abroad. Given the vast amount of data that the Cloud Intelligence Group manages, experts have cautioned that a public listing could attract significant attention from regulatory authorities.

Market experts have begun to reassess their outlook on Alibaba, with Morgan Stanley reducing its price target for the stock from $150 to $110. At present, Alibaba shares are trading at $76.11 per share in the U.S. premarket session. Additionally, analysts at the bank have shifted their allegiance to “Tencent,” citing various disappointments in Alibaba’s performance, including a slower-than-expected macroeconomic recovery, uneven cloud revenue growth, and the unforeseen reversal of the planned cloud IPO.

This abrupt about-face also underscores the broader geopolitical tensions prevailing between the United States and China. Alibaba’s significant investment in artificial intelligence (AI) as a means to keep pace with its American counterparts, such as Microsoft, Google, Meta, Amazon, Apple, and Microsoft-backed OpenAI, highlights the intricate tech rivalry between the two superpowers. Alibaba’s endeavors in AI have been extensive, with the integration of AI into various products and services. This has included customizing product recommendations, data analysis in industrial settings, and marketing efforts on platforms like Tmall, Taobao, and 1688 e-commerce sites.

Moreover, Alibaba has introduced a new iteration of its artificial intelligence model, Tongyi Qianwen 2.0, which competes directly with models from leading U.S. tech giants. This large language model, known as an LLM, represents a significant advancement in the field of AI and is poised to shape the future of generative AI applications. Alibaba’s journey through the complex web of geopolitics, financial markets, and technological innovation continues to be a fascinating narrative, one that will undoubtedly be closely monitored by stakeholders and observers alike.