Chinese technology giant Alibaba is shaking up its corporate structure in a series of moves that will allow large pieces of its business to raise capital and potentially even go public.
That may not be a bad idea, when you consider that the conglomerate’s revenue rose a middling 2% in Q1 2023 and its profitability is trending downward (operating income declined 9%) from a year earlier.
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Huge companies like Alibaba often don’t have many ways to make shareholders happy when growth is hard to come by. But one surefire way is to break the business down into smaller pieces and value each part individually. So if a company has a fast-growing business with good margins under the aegis of a slower-growing segment with low margins, it can “unlock” value by letting the market decide how much the more enticing pieces of the company are worth.
Alibaba’s plan to deconstruct itself has a few phases. First, the company in late March divided its operations into six major branches, all of which, apart from its Taobao and Tmall e-commerce businesses, will have the chance to chart their own financial paths. The company is spinning-off its cloud business, while the logistics unit, Cainiao, and its grocery effort, Freshippo, are on track for IPOs.
Of these, the cloud spinoff is worth spending a little time over, so we’re going to examine its Q1 results, contrast its performance with other public cloud companies and make some educated guesses about what it might be worth on its own.
Cloudy with chance of silver linings
Alibaba’s cloud business, comprising its public cloud (Alibaba Cloud) and its corporate chat platform (DingTalk) products, posted revenue of $2.71 billion in the first quarter of 2023, making up 9% of Alibaba’s total revenue. That’s a lot!