Should AliCloud Expansion Worry Amazon Stock Investors?

  • Alibaba has followed Amazon into another segment: cloud computing.
  • In less than a year, AliCloud has opened two data centers in Silicon Valley.
  • AliCloud’s value proposition for Chinese companies is clear, and now it targets US-based companies.

A few years ago, Alibaba (NYSE:BABA) came into our lives as the major Chinese corporations expanded abroad in light of the Chinese economic boom. The company was mainly focused on low-cost commerce platforms and quickly received the nickname ‘the Amazon of China’ even though the only resemblance between the two at that time was their e-commerce dominance in their home countries.

Alibaba’s nickname was a self-fulfilling prophecy as the Chinese giant recently decided to take on another core business of Amazon (NASDAQ:AMZN): Amazon Web Services (‘AWS’), Amazon’s cloud computing arm. In an earlier article covering AWS’s financials, I highlighted AWS’s importance to Amazon as it generated only 7% of the company’s total revenues but accounted for 37% of the operating profit. As shown in the chart below, Amazon leads the cloud computing market with a 28% share, well ahead of its competition. According to industry estimations, the cloud computing market size is in the range of $30B to $40B and expected to grow further as smart devices sales and IoT trends grow.

AMZN_chart 7_101315

Alibaba, as many other tech giants, wants a piece of the cloud computing market. In July, Alibaba announced a $1B investment to expand its cloud computing offering, directly targeting AWS. Alibaba’s cloud computing arm, AliCloud (also known as Aliyun), is currently focused mainly in Mainland China and Hong Kong with six different data centers in these areas addressing the Chinese market. To truly compete with AWS, AliCloud has to expand globally, and it recently announced its plans to do so. In March of this year, Alibaba opened its first data center in Silicon Valley, and last week, the Chinese giant opened its second data center in Silicon Valley.

Silicon Valley is only one of two locations that AliCloud has outside of China; however, as shown in the illustration below, the company plans to open three more locations in Japan, Germany, and Dubai.

AMZN_chart 8_101315

Source: AliCloud (Aliyun.com)

AliCloud has a very good value proposition for Chinese companies—in case companies want to expand globally, they don’t need to maintain data on several infrastructures, one for China and one abroad, but they can use AliCloud for both inside and outside of China. This is much more compelling to many Chinese businesses that deal with AWS, ALPHABET INC-C (NASDAQ:GOOG), or Microsoft (NASDAQ:MSFT) when they want to expand worldwide. In this niche, AliCloud has a clear advantage over AWS.

However, for AliCloud, this is not enough, and the company wants to become a significant player in the cloud computing market. Opening its second Silicon Valley data center signals that AliCloud is specifically targeting the U.S. market and wants to attract American companies to use its services. I believe that AliCloud has a long way to go before it starts to challenge AWS; however, judging from Alibaba’s rapid growth in other emerging business lines like AliPay, Amazon should be very concerned about the AliCloud expansion.

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