For the third trading day in a row, shares of Alibaba Group (BABA 0.39%) are sliding down, as investors continue to reckon with Alibaba's decision to not IPO its Cloud Intelligence Group (CIG) cloud computing and artificial intelligence (AI) business, but keep it in-house instead.
This morning, Reuters reported that Alibaba is shuttering its quantum computing research lab (which was part of the AI effort) entirely and donating the equipment to Zhejiang University. Alibaba stock fell 2% through 11:30 a.m. ET in response.
NYSE: BABA
Key Data Points
Everyone out of the AI pool
It's not immediately clear whether Alibaba might get some tax benefits out of this, as might be the case for a U.S. company, for example, making a charitable donation of equipment to a public university. What does seem to be clear is that the same "U.S. restrictions on export of advanced computing chips [that created] uncertainties for the prospects of Cloud Intelligence Group" and its ability to conduct high-level AI research have also made it difficult for Alibaba to advance in the area of quantum computing.
And so Alibaba is giving up on that, cutting its losses, and donating its equipment.
Bad news could be good news for Alibaba stock
This isn't a huge loss for Alibaba. According to Reuters, the quantum research unit had only about 30 researchers on staff, and this was only "a small part of Alibaba's overall R&D team." The abandonment of the effort, however, does seem likely to slow Alibaba's potential growth rate -- and cut off an entire area of potential research and growth for the company.
On the other hand, the good news is that CIG as a whole has been something of a money sink for Alibaba. Never profitable, the unit cost Alibaba $750 million in losses last year. By closing down at least one part of this business and keeping it in-house, Alibaba stands to lose less money on CIG.
What's more, the company intends to focus more on its profitable core retail business, which earned profits of more than $25 billion last year. If Alibaba continues to cut its money-losing divisions -- divisions that, when added up, eat up nearly $10 billion of the retail division's profits -- the company could trade for a P/E ratio of about 8.
Long story short, the more money-losing businesses Alibaba closes down, the more attractive its stock may become to investors.
