Shares of Alibaba (BABA 2.12%) were taking a dive today after the company reported results that were mostly in line with estimates, but said it was abandoning its plan to spin off its cloud business due to new U.S. export rules.
That announcement seemed to dash investor hopes for the breakup plan Alibaba announced back in March. As a result, the stock was down 8.3% as of 10:11 a.m. ET today.
Image source: Alibaba.
Alibaba's breakup plan takes a step back
In the September quarter, Alibaba's revenue rose 9% to $30.8 billion, which essentially matched analyst estimates, though that represents a sequential decline in revenue growth from 14% in the June quarter.
Profitability continued to improve, with adjusted earnings before interest, taxes, and amortization (EBITA, a non-GAAP, or generally accepted accounting principles, designation) up 18% to $5.9 billion, and on the bottom line, adjusted earnings per American depositary share (ADS) rose 21% to $2.14, which edged past expectations at $2.11.
However, the real reason for the sharp decline today seemed to be the company's decision to not spin off its cloud business. In the earnings release, Alibaba said of new U.S. export control rules, "We believe that these new restrictions may materially and adversely affect Cloud Intelligence Group's ability to offer products and services and to perform under existing contracts, thereby negatively affecting our results and financial condition."
The company also repurchased $1.7 billion worth of stock in the quarter and paid a special dividend of $1/ADS.
What's next for Alibaba?
Alibaba didn't offer guidance in its earnings report, but the update on the cloud business is clearly a disappointment. After its core e-commerce business, which includes Taobao and Tmall, the cloud group is its biggest business segment, both by revenue and profits, so it was seen as the most valuable asset in the spinoff plan.
While the situation seems to be fluid and could potentially change, the potential windfall from the spinoff is no longer being factored into the company's valuation.
