What happened
Shares of Chinese e-commerce giant Alibaba (BABA 0.29%) dipped in morning trading on the NYSE Tuesday and remain down 2.4% as of 12:45 p.m. ET on news that the company's cloud computing business is laying off workers.
Bloomberg broke the story today, reporting that Alibaba will lay off 7% of the employees at its cloud computing division before spinning this division off and IPO'ing it.
NYSE: BABA
Key Data Points
So what
Investors seem unhappy today, but this move actually makes sense. Alibaba Cloud is the company's second-biggest division by revenues (after e-commerce, of course), but after strong growth for years, its sales declined 5% last year -- and Cloud still isn't profitable for Alibaba.
Laying off workers, however, should cut Cloud's ongoing costs -- perhaps enough for the division to turn the corner and become profitable ahead of its IPO. That would make the division look more attractive to investors -- and presumably fetch a higher price for Alibaba.
Now what
That's good news, right? Then why is it sending Alibaba stock down?
Well, as it turns out, there's other news out today -- specifically, a downgrade from Susquehanna analyst Shyam Patil. The Fly reports today that Patil's worries over "macro and lingering pandemic impacts" to Alibaba's business have him cutting his price target on the stock by $15, to $160 per share. Then again, though, $160 per share is nearly twice Alibaba's current share price of $84 and change. (And of course, Patil recommends buying the stock).
So again, why is this stock down -- and trading for an apparently very cheap price of only 9 times free cash flow (albeit the P/E ratio is 20.5)?
Ultimately, that's hard to say. My strongest hunch is that investors remain leery of investing in Chinese stocks in general after watching the country's government act erratically on both COVID restrictions and economic policy these past few years, as well as worrying over the country's recent bellicose actions in the South China Sea -- and what might come next.
The good news is that none of this is really Alibaba's fault. The bad news, however, is that it's also not something that Alibaba has much influence over, or ability to change. Until something does change, investors should probably expect Alibaba shares to continue trading well below their apparent worth.
