Alibaba plans ambitious restructuring, will US big tech follow suit? – Stock Market News
As a highly volatile quarter for stock markets draws to an end, market participants are increasingly weighing the probabilities of a monetary tightening pause or even rate cuts following the turmoil in the banking sector. These developments tilted investor interest towards the tech industry in which we also got some groundbreaking news as Alibaba announced a plan to split its businesses into six smaller subsidiaries. So, what’s the outlook for tech firms and could they unlock value by a split-up approach?
Nasdaq gains on lower interest rates projections
The first quarter of 2023 was characterized by major systemic cracks within the banking sector. Even though the fallout from bank failures was contained by regulators and governments, this recent crisis inversely affected central banks’ strategies to restore price stability.
Remarks by both Fed and ECB officials tried to downplay the impact of high interest rates on the solvency of financial institutions, with ECB President Christine Lagarde stating that there is no trade-off between price and financial stability. However, investors seem to be in the opposite camp, suggesting that central banks will be forced to proceed with less aggressive tightening and even cut interest rates faster than they were previously anticipating.
Considering the renewed macroeconomic backdrop, it is clear that the tech-heavy Nasdaq 100 is the biggest winner within the equity space as lower interest rates result in higher valuation for growth firms. Additionally, the Fed’s latest liquidity injections to support banks have acted as a tailwind for risky assets, which could be also evident in crypto prices.
Alibaba lays out restructuring project
Diving deeper into the tech sector, on Tuesday we got some interesting news coming out of Alibaba as it announced some radical plans concerning its corporate structure. More specifically, Alibaba plans to break itself into six smaller companies, allowing each one of them to go public. This could unlock value by allowing the new firms to be more responsive to market changes. The good-performing segments could realise their full potential, while bad-performing divisions could be managed by specialists of each field who would not have to compromise or feel constrained by firm's broader strategic goals.
In the US, investors cheered this news, with the US listed ADR stock being around 15% up since the announcement. However, until the dust settles and the final structure of the firm is complete, there is still some uncertainty on whether this plan could work. Finally, we should also wait to see Chinese regulators’ response on this plan as their long-lasting regulatory assault on tech firms has caused severe problems in Alibaba during the last three years.
Could US tech behemoths follow Alibaba’s example?
Major US firms could gauge Alibaba’s performance to assess whether they could also benefit from such a restructuring. For instance, Meta could differentiate Metaverse from its social media platforms arm since the former has just been a cash black hole so far, acting as a drag on the firm’s overall performance and stock price.
Furthermore, Amazon, whose business model is very similar to Alibaba’s, could also gain from such a move. The tech giant could separate the Amazon Web Services (AWS) branch from the retail business so they both hold a valuation that reflects their fundamentals. Some investors think the former is better off trading as a tech stock with high growth prospects, whereas the latter should ideally be considered a defensive stock within the consumer staples sector.
Alibaba share on a wild ride
Alibaba’s stock has been experiencing significant swings in the past year due to the uncertain situation with China’s zero Covid policy and the Chinese government’s regulatory crackdown on tech firms. In contrast to what happened in the US tech sector, Alibaba experienced significant losses during the first quarter, while the surprising announcement on Tuesday induced some positive vibes.
In the positive scenario, the price could initially test the August resistance of $105.00 before the 2023 high of $121.00 appears on the radar.
Alternatively, bearish actions could sink the price towards the recent bottom of $79.50 or lower to challenge the 2022 low of $58.00.
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