The shocking decision by Alibaba Group Holding Ltd. to cancel the spinoff of its cloud division is offering a fresh reason for investors to sell China tech stocks in an earnings season yielding mixed results.
Alibaba plunged 10% Friday in Hong Kong after withdrawing plans to spin off and list its $11 billion cloud business due to US restrictions on advanced semiconductor sales to China. The announcement followed a similar warning from peer Tencent Holdings Ltd. on the impact of chip trade curbs.
Anticlimactic results overall show that fundamentals are still not strong enough to inspire renewed investor conviction on China tech. The nation’s economic malaise and more frugal consumer spending remain concerns, while the trade spat with the US has hindered shifts to more cutting-edge technologies.
Alibaba’s core business of selling goods online to Chinese customers recorded lower-than-expected sales amid the nation’s sluggish recovery. In addition to scrapping the cloud spinoff, the company also said it’s suspending a listing for popular grocery business Freshippo.
“We think the outlook for domestic e-commerce growth has weakened and the amount of value-unlocking capital market activities has decreased” following Alibaba’s results, Alex Yao, an analyst at JPMorgan Chase & Co. wrote in a note.