Alibaba’s Surprising Move Casts Shadow Over China’s Tech Sector

Alibaba Stock

Alibaba Group Holding Ltd. (NYSE:BABA) sent shockwaves through the tech industry by abruptly canceling the spinoff of its cloud division, providing investors with a fresh reason to divest from China tech stocks during an earnings season marked by mixed results.

On Friday, Alibaba’s stock plummeted 10% in Hong Kong as the company withdrew plans to spin off its $11 billion cloud business, citing US restrictions on advanced semiconductor sales to China. This move mirrored a cautionary statement from Tencent Holdings Ltd. regarding the impact of chip trade restrictions.

The lackluster overall results underscore that the fundamentals of China’s tech sector need to be more robust to reignite investor confidence. Ongoing economic challenges in the nation, coupled with cautious consumer spending and the lingering US-China trade tensions, continue to impede advancements in cutting-edge technologies.

Alibaba’s stock hit $22 billion as its core business, centered on online sales to Chinese consumers, reported lower-than-expected sales amid the country’s slow economic recovery. In addition to scrapping the cloud spinoff, Alibaba also announced the suspension of the listing for its popular grocery business, Freshippo.

Alex Yao, an analyst at JPMorgan Chase & Co., noted, “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 disappointing results.

While some companies exceeded consensus earnings estimates, concerns persist beneath the surface. Tencent’s shares remained subdued despite beating expectations in earnings, with analysts pointing to lackluster advertising revenue and subpar game sales. Inc. and NetEase Inc. experienced modest gains after reporting seemingly positive results. Despite these fluctuations, most major Chinese tech stocks, including Alibaba, saw an increase in Hong Kong trade on Monday.

Xu Dawei, a fund manager at Jintong Private Fund Management in Beijing, emphasized, “No matter what the earnings look like, the bottleneck for these firms is that they’ve reached their limit in domestic growth.” He added that the search for significant international growth opportunities, along with uncertainties surrounding new cloud and AI ventures, positions these companies as primarily rebound trades for now.

Despite initial optimism fueled by eased regulations on games, corporate cost-cutting measures, and lowered estimates, the mood quickly soured with the release of earnings reports. Chinese onshore traders exercised caution, selling stocks, including Tencent, during the busy earnings week. Foreign investors are also cautious, with three-fourths of Asia fund managers, according to Bank of America Corp., expecting the prolonged devaluation of China stocks to continue, maintaining a net underweight position on the market.

Jian Shi Cortesi, a fund manager at GAM Investment Management, highlighted the dependence of larger tech names on international flows to influence stock prices. Many international investors, she noted, are currently focused on macro and geopolitical factors, overlooking company fundamentals in the short term.

While there’s a positive note in the rebound of earnings estimates for the Hang Seng Tech Index from a low in April, the latest earnings reports may pose obstacles to further advancement. Despite the apparent cheapness of stock prices, with the Hang Seng tech gauge trading at 19 times forward earnings estimates—well below its five-year average of 28 times—some experts caution against indiscriminate bargain-hunting.

Liu Minyue, an investment specialist for Asian and Greater China equities at BNP Paribas Asset Management in Hong Kong, warned, “Some of these China tech stocks are no longer growth stories but are turnaround trades, with upside pinned on valuation recovery.” She added that these positions are shorter-term and can be quickly reversed if the anticipated turnaround doesn’t materialize.

Featured Image: Megapixl

Please See Disclaimer

About the author: I am a writer and an editor with experience in publishing, research, and SEO strategies. I have an honors BSc in Social Work from the University of Benin, Nigeria.