Alibaba‘s cloud computing and internet infrastructure business has been witnessing tremendous revenue growth over the past few quarters. For Q4 2016, this segment registered a 175% year-on-year revenue growth and this figure was 138% for the fiscal year 2016. (Read Alibaba Earnings: Mobile Growth In Retail, Cloud Computing Drive Results.) The company attributed this growth to an increase in the number of paying customers, which more than doubled over the past year to reach 500,000. Also a factor was an increase in the usage of the company’s more compact offerings, such as content delivery networks and database services. As Alibaba focusses on expansion of this business, especially beyond China, the cloud services segment can be the next growth driver for the company, with a consequent positive impact on its valuation.
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Global Ambitions For Cloud Computing
Alibaba is one of the largest cloud computing companies in the world. As a result, the company is now benchmarking itself against global competitors. While it enjoys a dominant position in China, it is now making inroads in other regions. Recently the company tied up with global consulting firm Accenture and software company SAP China to expand its cloud business in China and South East Asia. It announced an alliance with Korea-based SK holdings to provide cloud services to Korean and Chinese companies. Alibaba also launched its global start-up program called [email protected] Cloud in April this year, giving start-ups access to its cloud infrastructure, along with post-sales support, thus tapping into the growing start-ups in China. The company is working on several initiatives to provide innovative solutions for its cloud services users. It unveiled DT plus, a platform which is a one stop shop for big data related solutions such as computing engines, data analytics, machine learning and a data application. It also announced a partnership with Nvidia Corp on cloud computing and artificial intelligence and plans to enlist about 1,000 developers to work on its big-data platform during the next three years.
Cloud computing currently accounts for less than 4% of Alibaba’s net revenues. Yet, as the business witnesses high growth and operating leverage kicks in, it has the potential to become a high profit segment for the company, similar to Amazon’s web services division. As per our estimates, cloud computing and related businesses account for nearly 6% of Alibaba’s valuation. We expect revenues of this segment to grow from around RMB 4 billion in 2016 to more than RMB 9 billion by the end of our forecast period.
A faster pace of increase in these revenues can result in an upside to our price estimate.
While Alibaba has global ambitions for its cloud computing business, competition with players such as Amazon in regions where they have a strong presence might be difficult. However, the company can establish a strong consumer base in South East Asian countries and potentially Europe and the Middle East. We believe Alibaba’s cloud computing segment has a huge growth potential, given the company’s dominant position in China and its ability to establish itself in other emerging Asian economies. As its e-commerce segment matures in coming years, cloud computing can provide the necessary boost to the company’s revenues over the longer term.
Courtesy : forbes.com