I’m keeping an eye on Alibaba’s Cloud Computing spinoff. Here’s why | The motley fool

By | July 21, 2023

Ali Baba‘s (BABA -3.52%) stock has been under significant pressure recently due to its lack of growth over the past two years and the scrutiny it has received from the Chinese government. In response, the management team has split the conglomerate into six independent units, each charting its own path forward.

The first business unit to become fully independent is Alibaba Cloud. The plan is to list the subsidiary and distribute the shares as a dividend to the shareholders. In other words, Alibaba will not own any stake in this subsidiary after the restructuring.

Although it is still early days, I have started researching this business as this could be an excellent opportunity to own shares in a leading cloud computing company.

Not all investors are eager to own Alibaba’s spinoffs

When Alibaba announced its intention to create six business units and let each of them carve out its own path, it made a lot of sense. The conglomerate has become too large and complex to manage, and the Chinese government does not like any single company to have too much financial power.

Moreover, China’s competitive environment is intensifying and Alibaba needs to respond or risk extinction. So by giving full autonomy to Alibaba Cloud, the parent company kills a few birds with one stone.

But not all shareholders will agree to that move. For example, some shareholders may have concerns about whether the subsidiary can survive without the support of the parent company. Holding the shares in the new subsidiary may seem risky to them.

Some other investors may agree with Alibaba’s move but cannot own the spinoff stock as it would violate their mandate. For example, a fund manager bought Alibaba’s stock for its e-commerce business, and Alibaba Cloud doesn’t fit into that mandate. Another group of investors may have no opinion about the recent restructuring. All they know is that they have received some dividend in the form of shares. Understandably, these investors are likely to sell their spinoff shares.

In short, there will likely be selling pressure for some time when Alibaba Cloud’s stock begins trading on the stock exchange. But for long-term investors, this could be an excellent opportunity to buy shares in a company with bright prospects.

The long-term opportunity remains huge for Alibaba Cloud

While there are many reasons why investors might sell their spinoff shares, there is probably only one reason to hold on to the stock (or even buy more). It is the conviction that the company has good prospects ahead.

Indeed, Alicloud has a bright future ahead of it for several reasons.

For one thing, the global cloud computing market is massive and still growing strongly thanks to tailwinds like cloud migration, artificial intelligence and the Internet of Things. While Alibaba Cloud is only the fourth largest cloud player globally, with a 4% market share, it is the most important player in China with a 34% market share. Therefore, it is well positioned to benefit from the growth of this industry, especially in China and the rest of Asia.

As the leading player in China, Alibaba Cloud can leverage its scale advantage to expand its market share. For example, it announced a massive price cut (15% to 50%) in the first quarter of this year for many of its core offerings, which would result in new customer acquisitions and higher usage for existing customers.

Moreover, it has more flexibility to execute its strategies now that it operates as an independent company. Not only can it manage its business better – delighting customers more, making decisions faster and incentivizing its employees better – it can also target customers that it historically could not before. For example, it can better tailor its service to government entities by adjusting its policies on data security and cyber security risks.

And with Daniel Zhang, Alibaba’s former CEO and chairman, at the helm, Alibaba Cloud has the right team to take it to greater heights.

What should investors do now?

Alibaba’s investors have been frustrated over the past two years as the company’s share price has fallen. The spin-off could be what investors need now, as it would immediately unlock shareholder value.

Alibaba estimates the spin-off will take up to 12 months to complete, giving investors plenty of time to research. Existing investors should take this time to consider relevant information to help them decide whether they want to hold the spinoff shares or sell them as dividends.

Likewise, potential investors should do their homework in the next few months as this could be an excellent opportunity to own a leading cloud computing company.

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