Alibaba (NYSE:BABA) stock is the top-trending company on Yahoo Finance today after it canceled the spinoff of its cloud unit. The Chinese e-commerce giant made the decision because it’s worried about its ability to obtain advanced chips in the wake of America’s export restrictions on top-notch semiconductors.
BABA stock is down about 8% in early morning trading.
More Information on the Rationale Behind the Cancellation
Due to the Joe Biden administration’s decision to strengthen its restrictions “on (the) export of advanced computing chips” to China, Alibaba’s Cloud Intelligence Group is facing “uncertainties,” BABA explained in a statement. As a result, the conglomerate believes that the planned spinoff of the cloud unit might not help its shareholders.
The Potential Impact on the Owners of BABA Stock
Alibaba added that, instead of spinning off its cloud unit, it would “focus on developing a sustainable growth model for Cloud Intelligence Group under the fluid circumstances.”
Reading between the lines, I believe that BABA is saying that the U.S. export restrictions will significantly negatively impact its cloud unit’s growth and profitability going forward.
Indeed, the export restrictions may already be significantly lowering the unit’s growth, as its revenue increased only 2% last quarter versus the same period a year earlier.
Moreover, the cloud unit’s adjusted EBITA, which came in at $193 million last quarter, could drop significantly as a result of the restrictions. If the unit starts reporting negative quarterly EBITA, BABA’s EBITA as a whole would decline by several percentage points. Such a development would likely have a meaningful, negative impact on BABA stock.
Further, if Alibaba’s cloud unit, which had previously been viewed as likely to grow a great deal, starts to struggle tremendously, investors’ overall perception of BABA is likely to deteriorate sharply.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
