alibaba cloud spin off

Chinese tech giant Alibaba (NYSE: BABA) has said that it would spin off its cloud and AI unit through a stock dividend to stockholders which would be followed by an eventual listing of the business.

The company expects to complete the spin-off over the next 12 months and intends to rope in external investors into the unit.

Alibaba also said that it would pursue the IPO of Cainiao Smart Logistics unit where it holds a 67% stake.

Notably, in March, Alibaba restructured its business into six units: Taobao Tmall Commerce Group, Global Digital Commerce Group, Local Services Group, Cainiao Smart Logistics, Digital Media and Entertainment Group, and Cloud Intelligence Group.

Cloud Intelligence Group includes the company’s cloud and AI business. The business is led by Daniel Zhang who is also the CEO of Alibaba – corroborating the importance of the segment for the company.

BABA Sees a Big Opportunity in Generative AI

In April, Alibaba unveiled its large language model (LLM), Tongyi Qianwen. In its earnings release, it said, “We plan to integrate new LLM into all business applications across Alibaba’s ecosystem in the near future to further enhance user experience.”

Several other Chinese companies including Baidu have launched generative AI models.

During the earnings call, Zhang said, that generative AI is a “huge opportunity for us going forward.”

Meanwhile, Alibaba stock is trading lower today as its March quarter earnings disappointed markets.

The stock trades well below its 2020 highs and many investors are wary of the company given the geopolitical tensions between the US and China.

However, Michael Burry of “Big Short” fame doubled his fund’s stake in Alibaba to $10.2 million.

Burry, who for long has been predicting a market crash admitted that he was wrong and has recently scaled up his bets on stocks.

Alibaba to Spin Off Its Cloud Division

Alibaba reorganized its business to enhance stockholder value through the value unlocking of its various businesses.

When Alibaba went public in 2014, it became the biggest IPO of all time. However, last year, the stock briefly fell below the IPO price amid the crash in Chinese shares.

It has since rebounded – aided by the recovery in the Chinese economy post the lifting of COVID-19 lockdowns last year.

Markets are also bullish on the company’s business reorganization as it would help in unlocking value for emerging businesses like cloud and AI.

Dan Ives of Wedbush Securities told CNBC that the move to spin off the cloud business is a “no brainer strategic move that we believe adds to the sum of the parts valuation on BABA.”

He added, “We believe this was a step in the right direction for the Alibaba story.”

Meanwhile, BABA’s growth story has faded amid the structural slowdown in the Chinese economy.

Soaring of US-China tensions have not helped the cause of US-listed Chinese companies as many investors now find them “untouchable.”

Incidentally, even Warren Buffett exited Taiwan Semiconductor Manufacturing Company (TSMC) which he attributed to the changed geopolitical situation.

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