Alibaba plans to list cloud division as quarterly revenue misses expectations

Alibaba Cloud, the cloud computing subsidiary of Alibaba, unveiled its ChatGPT-style product Tongyi Qianwen during the 2023 Alibaba Cloud Summit on Tuesday morning.

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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

Meanwhile, China’s regulatory tightening of the past two years on tech has begun to ease, as Beijing’s enforcement of the rules becomes more predictable.

Some investors are betting on a strong recovery for China’s tech giants. On Tuesday, Michael Burry of “The Big Short” fame boosted his bets on Chinese e-commerce companies Alibaba and, doubling his stake in Alibaba to $10.2 billion and his holding to $11 million.

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

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

The firm is starting work to develop “vertical” models developed by third-party partners and developers but based on the firm’s own Tongyi Qianwen system.

On Wednesday, 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, after the company reported a solid bounce in revenue.

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