Mixed Reactions on Wall Street as Alibaba Abandons Cloud Spin-Off Plans

Chinese e-commerce giant Alibaba made waves in the financial world when it decided to scrap its plans to spin off and list its cloud computing business. This announcement, alongside its quarterly earnings report, had a significant impact on Alibaba’s stock, causing it to tumble by approximately 10% in the past week. While investors have expressed mixed sentiments about this development, Wall Street analysts have also presented contrasting views on the matter. In this article, we will explore the reasons behind Alibaba’s decision and the diverse opinions of financial analysts regarding its implications.

Alibaba’s Cloud Spin-Off Reversal

Alibaba’s decision to abandon its cloud spin-off plans took the market by surprise. The move came as part of the quarterly earnings announcement, and it triggered a notable decline in the company’s stock price. This reversal raised questions among investors and analysts about the motivations and potential consequences for Alibaba.

Morgan Stanley’s Concerns and Shift in Top Pick

Morgan Stanley, a prominent financial institution, responded swiftly to the news by removing its “top pick” label from Alibaba’s stock. The bank cited several reasons for this decision, including what it termed as a “negative surprise on cloud IPO.” According to Morgan Stanley analysts, this unexpected move has rendered their investment thesis on Alibaba “stale.”

The bank expressed concerns about the uncertainty surrounding consumption recovery and cloud business reacceleration. The cancellation of the cloud spin-off also played a role in the decision to shift its top pick to Tencent instead. Although Morgan Stanley maintained an overweight (buy) rating on Alibaba, it reduced the price target from $125 to $110, still implying significant upside potential for the stock.

Bernstein’s Critical Assessment

Bernstein analysts were equally critical of Alibaba’s earnings report, describing it as “lackluster.” They argued that the decision to cancel the cloud spin-off worsened the company’s “credibility problem” with investors. The analysts expressed dissatisfaction with another quarter of what they called “anaemic” growth for Alibaba’s core platforms.

Moreover, Bernstein suggested that canceling the cloud IPO right after announcing plans to reward shareholders better undermined confidence in management initiatives. As a result, the investment bank lowered its price target for Alibaba from $100 to $93.

Barclays’ Contrarian View

In contrast to its peers, Barclays took a contrarian view, suggesting that Alibaba’s decision to scrap the spin-off plans could ultimately be the “right decision” due to regulatory uncertainties. However, Barclays acknowledged that this cancellation would disappoint investors as it removed a near-term catalystA stock catalyst is an engine that will drive your stock either up or down. A catalyst could be news of a new contract, SEC filings, earnings and revenue beats, merger and acquisit... More for unlocking value.

The bank praised Alibaba’s “aggressive” share repurchases, highlighting the $3 billion bought back in the past four months, as well as the newly announced $2.5 billion in annual dividends. Barclays maintained an overweight rating and a price target of $138 on Alibaba, emphasizing that the focus on dividends and buybacks could still make Alibaba shares attractive for long-term investors.

Bottom-line: Alibaba’s surprising decision to abandon its cloud spin-off plans has elicited mixed reactions on Wall Street. While Morgan Stanley and Bernstein expressed concerns about the move and downgraded their price targets, Barclays took a more optimistic stance, suggesting that it might be the right decision given regulatory uncertainties.

Investors and analysts will closely monitor how Alibaba’s leadership navigates this new direction and whether it can deliver on its promises of shareholder value through dividends and buybacks.