Last week, Alibaba (NYSE: BABA) reported second-quarter results for its fiscal 2024, with revenue up by 9% and operating profit jumping 34% year over year. While the result wasn't mind-blowing, it was a solid improvement from last year.
Yet, shares of the Chinese e-commerce giant have tanked by more than 10% since its earnings announcement, indicating there are other issues investors are concerned about now. Let's look at the factors that might have caused the sell-off.
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The cloud unit's future looks uncertain
After reporting just 2% growth in its fiscal 2023, Alibaba started to show improvement as it entered fiscal 2024. Revenue increased by 14% and 9%, respectively, in the first two quarters of the new fiscal year.
However, not all business segments performed equally well. For example, while the logistics and overseas e-commerce segments grew at double digits in the second quarter, core businesses like cloud computing continued to underperform, growing at just 2% year over year.
The weak performance of Alibaba Cloud's business was not without reason. It suffered from a lack of attention from management in the past because senior leaders had to split their time in managing Alibaba's vast and diverse business empire. Worse, Alibaba's ex-chairman and CEO, Daniel Zhang, who was also the chairman and CEO of the cloud business at that time, stepped down unexpectedly in September. The ongoing strategic changes over the last few months meant Alibaba Cloud lacked the right leadership to right the ship.
Before investors could settle their emotions with the unexpected departure of Daniel Zhang, Alibaba dropped more disappointing news -- it canceled the spin-off of its Alibaba Cloud division. The company blamed prospects for U.S. export restrictions on advanced computing chips.
Naturally, investors disappointed by the decision to cancel the spin-off and the uncertain prospects in the cloud business have good reasons to sell Alibaba's stock. In particular, those who bought Alibaba's stock in anticipation of the Alibaba Cloud spin-off may not wish to hold on to the parent stock post-cancellation.
Alibaba's founder, Jack Ma, reduced his stake
Investors were already shocked by the decision to cancel the Alibaba Cloud spin-off. It didn't help that co-founder Jack Ma decided to reduce his stake in Alibaba at this sensitive time.
Naturally, investors took this news negatively (perhaps too negatively). There are many reasons for a founder to reduce his shares in a company. It might indicate a lack of confidence in the company's prospects, the selling of shares for other investments, or merely personal financial needs. In other words, Jack Ma's recent move could be personal and unrelated to Alibaba's prospects.
Besides, Jack Ma has long been reducing his involvement in Alibaba, having stepped down as CEO in 2013 and later resigning as chairman in 2019. As he moved away from the business, it was not unreasonable for him to reduce his ownership over time. His ownership in Alibaba had already fallen to 4.8% by 2020 (his stake was 7.6% in 2015) and could have fallen even more in recent years after he stepped down from the management team.
In other words, investors should take note of the recent share reduction but shouldn't be overly concerned about Jack Ma's move. Instead, they should focus more on the current management's vision and closely watch their execution in the coming quarters.
What it means for investors?
Investors were generally disappointed by Alibaba's decision to cancel the spin-off of its cloud division. Still, there are bright sides to the company. One is that overall revenue and net profit continued to improve thanks to the solid performance of the logistics and overseas e-commerce segments.
Besides, while the cloud division's prospects look uncertain today, it still benefits from megatrends like artificial intelligence (AI). We just need the new management team to execute well to capture the opportunity. With the new team at the helm for just a few months, investors should give Alibaba more time to prove its worth.
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Lawrence Nga has positions in Alibaba Group. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
