Alibaba Overhauls Cloud Unit Leadership After Scrapping IPO: Key Takeaways

Chinese tech giant Alibaba (NYSE: BABA) which scraped its cloud segment’s IPO plans has now overhauled the top leadership at the key business segment. Here are the key takeaways.

Alibaba would increase the focus on public cloud, hybrid cloud, and cloud infrastructure and reportedly Weiguang Liu would lead the public cloud division while Jin Li would head the hybrid cloud unit. Both of them will report to Alibaba’s group CEO Eddie Wu.

The cloud infrastructure unit would be headed by Jiangwei Jiang who would be reporting to loud division’s Chief Technology Officer Jingren Zhou.

Alibaba overhauled the leadership team in June also

Notably, Alibaba overhauled the leadership team in June also, and said that Daniel Zhang, who was then the current CEO and chairman of Alibaba Holdings – the parent company of the conglomerate – would step down in September.

The company bifurcated the roles and Joseph C. Tsai, who was then the Executive Vice Chairman of Alibaba Holdings became the chairman while Eddie Yongming Wu who was the Chairman of Taobao and Tmall Group became the CEO.

BABA reorganized its business

The leadership overhaul was preceded by a business reorganization. In March, the Chinese tech giant announced a business restructuring and said that it would become a holding company while splitting into the following six business units – all of which have the ability to consider capital raising and separate listings.

• Cainiao Smart Logistics which holds Alibaba’s logistics business.
• Taobao Tmall Commerce Group which has Alibaba’s online shopping platforms like Tmall and Taobao.
• Global Digital Commerce Group which houses the company’s international e-commerce operations including AliExpress.
• Cloud Intelligence Group which would include the company’s lucrative cloud and AI business.
• Local Services Group which is the company’s food delivery and mapping businesses.
• Digital Media and Entertainment Group which houses the company’s streaming operations.

It also announced that it would list its cloud business and in September it said that it would spin off its logistics arm Cainiao Smart Logistics Network Ltd listing it in Hong Kong.

Alibaba Scrapped the Cloud IPO

Earlier this month when Alibaba released the earnings for its fiscal second quarter of 2024, it said that it won’t proceed with the IPO of the cloud segment for now.

Alibaba said that it has scrapped plans to list the cloud business “in light of uncertainties created by recent U.S. export restrictions on advanced computing chips. Instead, we will focus on developing a sustainable growth model based on emerging AI-driven demand for networked and highly scaled cloud computing services.”

Notably, the US has banned the exports of high-end chips to China which might hamper the AI ambitions of Chinese tech companies.

During the earnings call, Alibaba said, “when we announced the full spin-off, we were looking at a way to sort of a financial engineering way to show the value of the business.” It however added, “But the circumstances have changed. And right now, rather than focus on financial engineering, we rather focus on figuring out how to grow the cloud business.”

Nvidia’s sales to be impacted by China export ban

While Chinese tech companies’ AI ambitions have taken a hit amid the export ban by the US, some of the US companies especially Nvidia are also at the receiving end. During their fiscal Q3 2024 earnings call earlier this month, Nvidia warned of a hit from the export ban on China, Vietnam, and some countries in the Middle East.

It said, “We expect that our sales to these destinations will decline significantly in the fourth quarter, though we believe will be more than offset by strong growth in other regions.”

Nvidia’s CFO Colette Kress said, “The export controls will have a negative effect on our China business, and we do not have good visibility into the magnitude of that impact even over the long term.”

She added, “We are, though, working to expand our data center product portfolio to possibly offer new regulation compliance solutions that do not require a license. These products, they may become available in the next coming months. However, we don’t expect their contribution to be material or meaningful as a percentage of the revenue in Q4.”

Alibaba to pay dividends

Coming back to Alibaba, the stock tumbled following the earnings release as the scrapping of the cloud IPO spooked investors.

Meanwhile, the company also initiated a dividend of $1 per ADS (American Depository Share) which would mean a cash outflow of around $2.5 billion, and noted that it has another $13 billion available under its share buyback plan. However, the company ruled out a special dividend to lower the cash on the balance sheet.

Alibaba said that it generated free cash flows of $27 billion in the last 12 months and had around $63 billion in cash and cash equivalents on the balance sheet at the end of September. It stressed, “Alibaba has never been in a better financial position to invest for the growth of our businesses.”

Analysts on BABA stock

After the fall in BABA stock, while many analysts lowered their target price, some see value in beaten-down Chinese stocks. China-listed stocks have underperformed in 2023 amid a disappointing economic rebound and the growing US-China rivalry.

Meanwhile, Alibaba is also battling slowing growth in China and while its revenues in the September quarter rose 9% YoY and were in line with estimates, it missed bottomline estimates.

China’s economic rebound this year hasn’t been to the scale that economists were expecting and even the sales at this year’s annual 11:11 Chinese shopping holiday were tepid as compared to what we have seen historically.

Jefferies sees value in Chinese stocks like Alibaba, JD.com, and Baidu and said in a client note, “China by far has the best FCF cover in Asia along with a high net cash proportion of companies, indicating significant potential to boost shareholder returns. Indeed, with the pace of growth slowing for the sector and valuations at multi-year low, it makes an easy case for the FCF to be used for buybacks (and to increase dividends).”