Alibaba announces plans to spin off its cloud division

Alibaba announced plans to spin off its cloud division as a separate, publicly traded company, while the Chinese e-commerce titan’s quarterly revenue missed expectations.

“We are taking concrete steps towards unlocking value from our businesses and are pleased to announce that our board has approved a full spin-off of the Cloud Intelligence Group via a stock dividend distribution to shareholders, with intention for it to become an independent publicly listed company,” company CEO Daniel Zhang said.

Alibaba shares were down 2.4% in early U.S. trading, following an initial drop of around 1% shortly after the earnings report was issued, as investors reacted to the company’s results and spinoff plans.

Here’s how Alibaba did in the quarter, which ended March 31, 2022, compared with Refinitiv consensus estimates:

• Revenue: 208.2 billion Chinese yuan ($29.6 billion) vs. 210.2 billion yuan expected, up 2% year on year
• Non-GAAP diluted earnings per share: 1.34 yuan vs. 2.08 yuan expected, up 35% year on year

Restructuring effort
The report is Alibaba’s first since splitting into six units and is also the first whose numbers reflect China’s reopening. The country in December abruptly ended its strict Covid controls, such as lockdowns and travel restrictions.

In its report for the fiscal fourth quarter, Alibaba said it plans to spin off its cloud division as a newly listed company, subject to restructuring certain assets, liabilities and contracts, and regulatory approvals.

Alibaba is a major player in cloud computing in its home country and increasingly seeks to compete with established U.S. giants, such as Amazon and Microsoft.

Dan Ives, an analyst at Wedbush Securities, said Alibaba’s cloud spinoff plan was a “no brainer strategic move that we believe adds to the sum of the parts valuation on BABA.”

“We believe this was a step in the right direction for the Alibaba story,” Ives told CNBC in emailed comments Thursday.

The company also announced plans to raise money from outside investors for its international digital commerce group, which includes the Lazada and AliExpress online shopping platforms.

Alibaba also said it intends to launch an initial public offering for its Cainiao Smart Logistics unit, in which it currently holds a 67% stake. The IPO is slated to complete in the next 12 to 18 months.

Alibaba’s board approved the start of an exploration of listing its Freshippo retail business in the next six to 12 months, the company said.

Slow start
The year got off to a tepid start, with overall sales of online physical goods staying weak, bosses of major e-commerce platforms suggested in February.

Retail sales in China rose by 18.4% in April, according to recent economic data. China’s economy grew 4.5% in the first quarter, achieving the fastest pace in a year. The performance was expected to boost Alibaba’s sales.

The company operates two of the largest online shopping sites in China: Taobao and Tmall. Despite ann increase in competition, Alibaba’s results remain an important indicator of the world’s second-largest economy.

China generates almost 50% of the world’s online shopping transactions.

Alibaba said it saw positive domestic growth momentum in March, after a slow start to the year.

Overall for the quarter, the company’s Taobao and Tmall platforms saw mid-single-digit declines for their online physical goods orders, but by May, they “turned positive, driven by strong growth of fashion & accessories and healthcare categories,” the company said.

The Thursday earnings figures are the first since Alibaba announced a substantial overhaul of its organization, splitting the business into several distinct units in a development that several analysts interpreted as signaling an easing in Beijing’s crackdown on tech companies.

The new company structure is broken down into six divisions: Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics, Global Digital Commerce Group, and Digital Media and Entertainment Group.

Generative A.I. in demand
Some investors are betting on a strong recovery for China’s tech giants.

Michael Burry of “The Big Short” fame has ramped up his wagers on Chinese e-commerce companies Alibaba and JD.com, doubling his stake in Alibaba to $10.2 million and his JD.com holding to $11 million, according to a regulatory filing out Monday.

Artificial intelligence is expected to be a major driver of Chinese tech companies’ performance going forward.

Alibaba, which developed its own ChatGPT-style generative AI tool Tongyi Qianwen earlier this year, said that the system could help accelerate customer adoption of its cloud computing service.

Cloud computing was a weak spot for the company in the March quarter, with sales dropping 3% year-over-year to 24.6 billion yuan. This was caused in part by delays in delivery of hybrid cloud projects due to a resurgence of Covid in January, as well as a top customer phasing out use of Alibaba’s cloud services overseas, Alibaba said.

So far, Alibaba has seen ample demand for its Tongyi Qianwen product, company management said on the firm’s earnings call, with 2,000 enterprise customers applying for trial access.

Generative AI is a “huge opportunity for us going forward,” Alibaba CEO Daniel Zhang said on the call. He added that the technology will result in an “exponential increase” in computing power, as advanced AI programs require high-performance infrastructure.

Alibaba is also beginning work to release “vertical” models developed by third-party partners and developers but based on the firm’s own Tongyi Qianwen system.

The comments come after Tencent’s president, Martin Lau, said the company has been “making good progress” in building foundation models, the systems which underpin AI chatbots like ChatGPT. Tencent reported a solid bounce in revenue Wednesday. CNBC