Alibaba Flagged That US Chip Curbs Clouded Its Cloud Computing Prospects

Alibaba Group Holding Limited BABA shares tumbled almost 10% in Hong Kong today after its announcement that it will not proceed with the spinoff of its cloud group that competes with Amazon.com Inc AMZN Amazon Web Services as well as with Microsoft Corporation MSFT Microsoft Azure.

The Cloud Intelligence Group Will Not Be Publicly Listed Due To U.S. Chip Export Restrictions

Alibaba revealed it will not be listing its cloud computing segment that is the infrastructure of the digital economy due to U.S. chip curbs. The U.S. made it harder for Chinese companies to get their chip supplies from U.S. companies by restricting exports, harming Nvidia Corporation NVDA and its advanced AI-focused hips, H800 and A800 and creating uncertainties also for prospects of Alibaba’s cloud arm due to which the Chinese titan decided to shelve its spinoff plan.

Quarterly Highlights

For the quarter that ended on September 30th, Alibaba reported revenue rose 9% YoY to 224.79 billion yuan (31.47 billion) which met expectations with net income attributable to shareholders of 27.7 billion yuan ($3.8 billion). Yet, Alibaba chairman Joe Tsai assured that the company has never been in a better financial position to invest in its business growth as it ended the quarter with $63 billion in net cash. 

Alibaba has flagged the impact of U.S. chip curbs, with its stock plummeting as a result. As for its quarterly report that is viewed as an indication of the health of Chinese consumers, its bottom line came short of estimates but its top line was in line with what analysts were expecting. All in all, although there was no boom after Covid-19 lockdowns ended due to other structural challenges and a property crisis that tempered with China’s recovery, Tsai did say that despite the global uncertainty, the operating environment has improved and is more stable. Alibaba also revealed it recorded healthy YoY user growth of its Taobao and Tmall domestic online shopping sites.CEO Eddie Yongming WU stated that going forward, Alibaba will be performing a strategic review of its businesses in order to separate core businesses that demand a long-term focus and commitment from noncore operations.

AI Is At The Heart Of Its Strategic Direction

Alibaba did state that AI is a big part of its strategy going forward, but that front is already crowded with competition from Tencent Holdings Limited TCEHY and Baidu Inc BIDU, as well as U.S. tech titans, namely Amazon, Meta Platforms META, Alphabet GOOG-owned Google and Microsoft-backed OpenAI. Interestingly, Baidu who is among the leading AI firms, warned this week about the consequences of China’s rush to develop AI models. On Wednesday, Baidu CEO Robin Li warned that all that rush to develop large language models could result in a waste of resources. Baidu CEO advised companies to focus on developing practical applications as many companies who are developing these models have yet to find viable business models. Last month, Baidu revealed the newest version of its generative AI model Ernie 4.0. Also, Baidu opened Ernie for public use back in August. AI is a big part of Alibaba’s cloud computing unit so perhaps this is why the unexpected announcement of a ditched spinoff overshadowed its quarterly results that were not at all bad. 

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