Alibaba’s U-turn on the cloud unit spin-off lops $20 billion off its market value. Alibaba Group’s (9988. H.K.) Hong Kong shares dropped by ten percent on Friday after the company said it was abandoning plans to spin off its cloud business. The company cited concerns caused by restrictions imposed by the United States on shipments to China of semiconductors used in applications using artificial intelligence.

The dip, perhaps the company’s most significant one-day decrease in more than a year, reduced the market worth of the Chinese I.T. behemoth by around $20 billion.

It was the first market reaction in Asia after the surprise strategic reversal was unveiled late on Thursday. Following the announcement, the company’s U.S.-listed stocks dropped by 9% by the end of trading. On Friday, a 10% drop was seen at the market closing for equities in Hong Kong.

“The shelving is a surprise, and it makes us wonder if there are issues behind the scenes that we aren’t aware of,” said Jon Withaar, the Singapore-based director of Asia Exceptional Circumstances at Pictet Asset Management. “The shelving makes us wonder if there are issues behind the scenes that we aren’t aware of.”

Concerns highlighted by Alibaba about the U.S. export curbs announced by Washington in October come on the heels of similar concerns raised this week by Chinese social media and gaming firm Tencent Holdings (0700. H.K.). Tencent Holdings stated that the restrictions would require looking for alternatives manufactured locally in China. Alibaba’s concerns follow in the footsteps of Tencent Holdings’ statements.

Alibaba, previously the most valuable stock in Asia, peaked in October 2020 at a valuation of over $830 billion but is now valued at less than a fourth of that amount. This is because business has taken center stage in Beijing’s technology sector crackdown, as well as in the Chinese economy.

The most recent news about Alibaba highlights the broader challenges China’s technology companies are struggling against. Due to the export restrictions, it is now more difficult for these companies to obtain vital chip supplies from American businesses.

In March, Alibaba made public its intentions to spin off its cloud computing division as a part of the most significant corporate reorganization in its 24-year history, establishing six distinct business divisions.

The cloud division had been projected to be valued between $41 and $60 billion by analysts at the time. Still, they had cautioned that its listing might attract scrutiny from Chinese and foreign regulators due to the vast amounts of data it maintains.

In addition to the announcement of its quarterly profits on Thursday, the Hangzhou-based firm placed a listing proposal for the Freshippo grocery business on hold.

The revelation that the family trust of Jack Ma, one of Alibaba’s co-founders and a former chief executive, intended to sell 10 million American Depository Shares in Alibaba was also predicted by analysts to potentially influence the company’s share price.

“Despite Ma’s no longer being involved in operations, we believe that Ma’s selling Alibaba at a depressed valuation may hurt sentiment,” a UBS analyst named Kenneth Fong said in a note earlier this week.

CENTER ON AI

During a post-earnings conference call on Thursday, Alibaba Chairman Joseph Tsai stated that the firm will now concentrate on expanding its cloud business and providing funding for the artificial intelligence (AI) drivers it employs.

According to some experts, keeping the cloud business might help Alibaba advance in the artificial intelligence space.

The firm believes that the chip prohibition will significantly and negatively impact its capacity to deliver products and services in the long run. “But it also points to the increasing importance of retaining the cloud unit given the surging demand for A.I. computing in China,” said U.S. Tiger Research analyst Bo Pei. “It also points to the increasing importance of retaining the cloud unit.”

According to LSEG statistics, experts predicted that Alibaba would post sales of 224.32 billion yuan for the second quarter, but the company recorded revenue of 224.79 billion yuan ($31.01 billion).

On the call, Eddie Wu, the Chief Executive Officer of Alibaba, provided a comprehensive overview of the firm’s plans. He stated that each of Alibaba’s companies would approach the market more autonomously and that the company would carry out a strategic assessment to differentiate between “core” and “non-core” operations.

Some observers have stated that they have a favorable impression of Wu’s approach and that it is reasonable to anticipate that he would reevaluate the choices taken by his immediate predecessor, Daniel Zhang, who unexpectedly resigned in September, barely two months after emphasizing cloud computing.

According to an analyst at Union Bancaire Privée named Vey-Sern Ling, “Giving away the cloud business clearly isn’t the best way to enhance shareholder value any more, given depressed market valuations and the fact that the share price has barely moved since the announcement.”

Additionally, the business stated that it intends to move on with a listing of Alibaba’s logistics subsidiary, Cainiao, which applied to an initial public offering in Hong Kong in September.

In addition, it is getting ready to seek outside funding for its international digital commerce subsidiary, which is home to several overseas platforms, including Lazada and Alibaba.com.