Alibaba Stock: Why Cloud Computing Could Be Equivalent to AWS

- August 18, 2017

Wall Street is drooling over Alibaba Group Holding Ltd (NYSE:BABA) fiscal first quarter results, where revenue grew 56% year-over-year to $7.4 billion and beat expectations by a whopping $250 million. What Alibaba stock owners should really be excited about is its cloud computing prospects.

Alibaba’s cloud computing business ended up growing 92% vs the same period last year, and 14% sequentially. After peaking with growth of 162% in its fiscal fourth quarter of 2016, the previous four quarters had seen deceleration of growth. The first quarter’s 92% growth not only represents a slight acceleration over the previous quarter’s performance, but suggests that 90% growth could likely be sustainable.

For the record, Microsoft’s Azure has become very relevant very fast with sub-90% growth on a consistent basis. It does not take long to become a big business with that kind of performance.

With that said, cloud service providers like Amazon, Microsoft, and Google are all competing for the same pie, and have aggressively cut service prices over the last five years to try and lure customers onto their respective platform. Amazon.com (NASDAQ:AMZN) has without question done the best with AWS, as it remains the market leader by a mile.

Last year, AWS created more than $12 billion in revenue. The HADE Platform’s machine learning algorithms, which have proven far superior to Wall Street expectations, figures AWS will grow to nearly $21.4 billion by the end of 2018.

AWS will continue to grow revenue as it adds more customers and creates higher revenues from existing customers. Not only is cloud services a recurring revenue stream, but infrastructure and platform as a service constantly require customers to scale with higher consumption. That’s how cloud services will continue to grow fast for years to come.

That said, one reason for AWS dominance is that Amazon.com was first in this space. It has a multi year head start over the competition. Therein lies one big reason that Alibaba investors should be so excited about the company’s performance in cloud computing.

Alibaba is not doing anything new. However, cloud computing is just getting warmed up in China, and in China, Alibaba does not have to compete with the American cloud computing juggernauts.

With over a million customers and very little revenue relative to its user base, we have to believe that Alibaba’s cloud business will have many years of rapid growth as consumption surges in China. Notably, China is the world’s largest market, and that presents a golden opportunity for Alibaba’s cloud computing business to eventually become the next AWS. In fact, one could argue successfully that Alibaba has far greater long-term potential in China than any of the major tech companies in the U.S.

Why I sold with no plans to buyback Alibaba stock

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