Alibaba's (BABA +1.31%) stock has been under significant pressure of late amid its lack of growth over the past two years and the scrutiny it has received from the Chinese government. In response, the management team has broken the conglomerate into six independent units, each charting its own path forward.
The first business unit that will become fully independent is Alibaba Cloud. The plan is to list the subsidiary and spin off the shares as dividends to shareholders. In other words, Alibaba will not own any stake in this subsidiary after the restructuring.
While it's still early, I have started researching this business since this could present an excellent opportunity to own stocks in a leading cloud computing company.
Not all investors are eager to own Alibaba's spinoffs
When Alibaba announced its intent to set up six business units and let each of them chart its own path, it made a lot of sense. The conglomerate has become too big and complex to manage, and the Chinese government doesn't like any single company to wield too much economic power.
Besides, China's competitive environment has intensified, and Alibaba has to respond or face the risk of extinction. So by giving full autonomy to Alibaba Cloud, the parent company is killing a few birds with one stone.
But not all shareholders will agree with that move. For instance, some shareholders may have concerns about whether the subsidiary can survive without support from the parent company. Holding on to the stock of the new subsidiary may seem risky to them.
Some other investors may agree with Alibaba's move but be unable to own the spinoff stock since it would violate their mandate. For example, a fund manager bought Alibaba's stock for its e-commerce business, and Alibaba Cloud doesn't fit into that mandate. Another group of investors may have no opinion on the recent restructuring. All they know is that they have received some dividend in the form of stocks. Understandably, these investors will likely sell their spinoff stocks.
In short, there will likely be selling pressure for some time when Alibaba Cloud's stock begins trading on the stock exchange. But for long-term investors, this can be an excellent opportunity to buy shares of a company with bright prospects.
NYSE: BABA
Key Data Points
The long-term opportunity remains huge for Alibaba Cloud
While there are many reasons investors might sell their spinoff stock, there is likely just one reason to hold on to the stock (or even buy more). That's the belief that the company has good prospects ahead.
Indeed, Alicloud has a bright future ahead of it for several reasons.
One thing is that the global cloud computing market is massive and still growing strongly thanks to tailwinds like cloud migration, artificial intelligence, and the Internet of Things. While Alibaba Cloud is only the fourth-largest cloud player globally, with a market share of 4%, it is the most significant player in China, with a 34% market share. Therefore, it is well positioned to benefit from the growth of this industry, particularly in China and the rest of Asia.
As the leading player in China, Alibaba Cloud can exercise its scale advantage to expand its market share. For instance, it announced a massive price cut (15% to 50%) in the first quarter of this year for many of its core offerings, which would result in new customer acquisitions and higher usage for existing customers.
Besides, it has more flexibility to execute its strategies now that it's operating as an independent company. Not only can it manage its business better -- delighting customers more, making decisions faster, and incentivizing its people better -- it can also target customers that it historically could not before. For example, it can better tailor its service to government entities by adjusting its policies on data security and cybersecurity risks.
And with Daniel Zhang, Alibaba's ex-CEO and chairman, at the helm, Alibaba Cloud has the right team to take it to greater heights.
What should investors do now?
Alibaba's investors have been frustrated over the last two years as the company's stock price tanked. The spinoff could be the thing investors need now, as it would immediately unlock shareholder value.
Alibaba estimates the spinoff will take up to 12 months to complete, giving investors plenty of time to research. Existing investors should take this time to consider relevant information to help them decide whether they want to hold on to the spinoff stocks or sell them as dividends.
Likewise, potential investors should do their homework in the next few months, as this could be an excellent opportunity to own a leading cloud computing company.
