Alibaba (BABA) Cashes Out Of Gaming To Double Down On AI

Alibaba Group (NYSE:BABA) divested its entire stake in game studio Lingxi Games to private equity firm Trustar Capital, a deal resulting in a payout exceeding $2 billion. The shift in focus for Alibaba is evident, as it has recently sold off other non-core assets like hypermarket chain Sun Art and department store operator Intime.

The company is shifting its resources towards AI and cloud computing, with Qwen, its open-source family of large language models, being a key driver. Qwen has already amassed over 100 million monthly active users, while cloud revenue grew by 34% in the latest fiscal year, and AI-related products saw triple-digit growth for eleven consecutive quarters.

Shares of Alibaba surged 27.4% in July as Chinese AI models gained investor interest, and buybacks have reduced shares outstanding by 8.5% over the past three years. The Lingxi sale also reflects Alibaba's desire to de-emphasize the e-commerce division, which continues to face strong competition from Pinduoduo, JD.com, and Douyin.

The company's retail business has seen sluggish growth, and high expenditures in quick commerce have impacted profitability. Additionally, the Chinese gaming sector has faced regulatory challenges, with the recent sale of Lingxi serving as a reminder of the potential impact of policy changes. As of August 18, Alibaba is trading at a forward earnings multiple of 17.01, which presents opportunities for growth if AI and cloud services keep expanding.

However, the company's focus on AI, cloud, and core commerce may present risks for investors concerned about its retail segment and regulatory environment.