Alibaba: Spinning off its cloud business may be a stroke of genius. Here because. | The motley fool

Alibaba (BABA 3.71%)the Chinese technology conglomerate, surprised everyone when it announced its decision to spin off its cloud computing business.

Most investors didn’t see this coming as the cloud business has been a highly valued segment within Alibaba and investors expected the parent company to retain control of this business for the foreseeable future.

And while there are differing views among investors on this decision, I think it’s a brilliant move that can generate significant value for the cloud business and shareholders over the long term.

Image source: Getty Images.

Bring back focus and entrepreneurship

Alibaba’s cloud computing has been a rising star as it enjoys the tailwind of a growing cloud computing industry in China.

But after growing at incredible rates for many years, the cloud business grew 4% in fiscal 2023 (ended March 31). Worse, revenue fell 2% year over year in the final quarter of fiscal 2023.

While many reasons contributed to its poor performance, lack of management attention and focus could be a significant factor. Alibaba’s colossal empire spanning multiple industries is too much for any management team to keep up, let alone deliver world-class performance.

So, Alibaba’s restructuring plan to break down its empire into six independent business units is the medicine it badly needed to get back in shape. And by separating its cloud computing business, the tech company is taking the next step to giving its son the independence he needs to chart his own path.

As an autonomous company, the cloud business can focus on satisfying its customers, respond faster to competitive pressures, better incentivize its employees, and make decisions faster. Ultimately, this could bring back the entrepreneurial spirit that has likely been lost in the vast conglomerate structure of the company’s past.

As cloud computing becomes an increasingly essential industry amid the rise of trends such as artificial intelligence, autonomous driving and the Internet of Things (IoT), Alicloud will need the full attention of its management team to run and deliver results, and this spin-off is probably the answer.

Opening new avenues for growth

Alicloud may have been the undisputed leader in the Chinese cloud computing market (with 37% market share), but it can do better as a standalone company.

One challenge is that Alibaba’s cloud computing business will find it difficult to have customers that compete with its subsidiary. For example, Pinduoduo AND JD extension. com they will likely never feel comfortable using Alibaba’s cloud computing service given their rival relationship with Alibaba’s e-commerce business. More likely, these companies will gravitate towards Alicloud’s competitors, such as Tencent Cloud.

Another possible obstacle is that many Chinese government entities may not be willing to use Alicloud’s service, even though it may be the best service provider or have the lowest prices, amid concerns about issues such as data security and cyber security risks.

Alicloud can address many of these issues and gain market share by operating as an autonomous entity. It can address security, privacy and data sovereignty issues with appropriate policies and serve new customers after removing the conflict of interest. It also has greater flexibility in forming partnerships and collaborations, leading to better innovation, better service offerings, and new market expansion.

It won’t surprise me if Alicloud quickly resumes its historic growth trajectory as it embarks on this new journey!

Kill two birds with one stone

It’s been a tough few years for Alibaba, which has faced increasingly competitive external pressures and a weak economy.

The spin-off will give the cloud company the independence it needs to execute its strategies and the opportunity to acquire new customers. And while there’s no guarantee that all of the above benefits will materialize, I like that Alibaba’s president and CEO, Daniel Zhang, will be the leader of this new entity.

It will be a new chapter for the cloud business. As a shareholder, I look forward to participating in it.