Alibaba shares were on track for a second day of losses after the Chinese technology giant revealed on Thursday that new US export restrictions on chips are hurting its cloud computing business.
Shares of Alibaba (ticker: BABA ) fell 2.6% in Friday trading, extending the pain after the stock tumbled 9.1% on Thursday, its worst daily performance in more than a year.
Alibaba’s better-than-expected quarterly results, released on Thursday, were completely overshadowed by the shock news that it canceled a hotly anticipated spin-off of its cloud computing division, which included its efforts in artificial intelligence (AI).
Alibaba said the expansion of US chip export restrictions in October – an attempt by the White House to limit China’s access to critical technology such as AI – “could materially and adversely affect Cloud Intelligence Group’s ability to deliver products and services and operate under existing contracts. This would negatively impact our operations and financial condition”. The cloud arm spinoff has been put on hold for shareholders as a result of the division’s cloudy prospects, the company added.
This is bad news for Alibaba stock for two reasons. For one, the group has revealed that its most exciting and growth-oriented segment is facing uncontrollable material impact. Two, the cloud spinoff was central to Alibaba’s ambitious plan announced earlier this year. Not anymore.
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Wall Street didn’t blink, and analysts rushed to cut their price targets on Alibaba shares, many of which had been hit by three years of underperformance, largely as a result of regulatory issues.
“We believe the stock has sold off ~10%. We view Alibaba as an attractive turnaround story,” said Mizuho analyst James Lee. The volume of shares refers to investors who bought Alibaba shares after the spinoff was revealed — on the expectation that the shares will reduce their collective discount if the cloud division achieves its own valuation. Basically there is trade.
Lee’s team at Mizuho cut its price target on Alibaba to $87.07 from $120. The stock closed at $79.11 on Thursday.
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“The further pursuit of its cloud spinoff is not a setback for its capital management program,” said Fawn Jiang, an analyst at Benchmark. “This was undoubtedly a disappointing quarter; however, we did not see a structural fundamental change.” Benchmark maintained its Buy rating with a $150 price target—still a good call.
22 analysts surveyed by FactSet cut their price targets on Alibaba shares following Thursday’s news, with other analysts mostly following suit in lowering their expectations.
Write to Jack Denton at [email protected]
