Shares of Chinese e-commerce giant Alibaba Group Holding fell by nearly 10% on Friday, one day after it backpedalled plans to carve out its $11 billion cloud business and take it public.
The share slide in the Hong Kong Exchange on Friday wiped out more than $20 billion in market value from the Chinese e-commerce and technology leader. Alibaba has a market capitalization of $1.49 trillion as of Friday.
Alibaba cited growing U.S. restrictions on chip sales to China as the main driver behind the decision not to spin off its Cloud Intelligence Group in its quarterly earnings report released on Thursday. The firm said the controls have “created uncertainties” about the business’s prospects, and that they may adversely affect its performance and product offerings.
In October, the Department of Commerce announced it would be expanding its export controls on chips to prevent China from acquiring advanced computer chips and semiconductor manufacturing equipment. It also extended the restrictions beyond Macau and China to all 21 countries for which the U.S. maintains arms embargoes.
Co-founder and Chairman Joseph Tsai told analysts following the earnings report that when Alibaba announced the full spinoff, it was looking at a way of displaying the value of the business through “financial engineering.”
“But the circumstances have changed,” Tsai said. “And right now, rather than focus on financial engineering, we would rather focus on figuring out how to grow the cloud business.”
This involves focusing on having “cash to make investments — because in the AI-driven world, to develop a full-blown business based on a very networked and highly scaled infrastructure requires investment.”
Alibaba had planned to split its sprawling business into six independent parts — and publicly list five of them — focusing on cloud computing, e-commerce and logistics. The company also said it would be putting plans to take Freshippo, its proprietary grocery retail chain, on hold, pointing to market conditions and other factors.
Despite the roadblocks on some of its plans, Tsai reassured investors that Alibaba’s position remains strong.
“We ended the quarter with $63 billion in net cash, and we generated $27 billion in free cash flow in the last 12 months,” he said on Thursday’s call. “Alibaba has never been in a better financial position to invest for the growth of our businesses.”
The company reported a net income of 26.7 billion yuan ($3.66 billion) in its latest quarter, compared with net loss of 22.47 billion yuan ($3.11 billion) in the same quarter of 2022. Revenues from its Cloud Intelligence Group grew 2% year-over-year to 27.6 billion yuan ($3.80 billion) — its most lucrative unit.