Alibaba Group Holding Ltd (NYSE:BABA) stock is about to double for the year, driven by better than expected revenue growth.
It has been a great year for the shareholders of Chinese eCommerce giant Alibaba Group Holding Ltd (NYSE:BABA). Driven by the strong earnings performance and very bullish outlook, Alibaba stock is about to double this year. Alibaba stock has also received several price target upgrades after the recent earnings. Raymond James has a price target of $220 on Alibaba shares, almost 30% upside from yesterday's closing price and Barclays increased its price target on the stock from $180 to $200. While analysts expect eCommerce to remain a key growth driver, other segments especially its cloud computing business will also be a huge contributor to Alibaba's growth.
Riding high on cloud
Alibaba's cloud computing business has been booming for a while now. Following the footsteps of Amazon (NASDAQ:AMZN), Alibaba too had launched its cloud computing business a few years back and while Alicloud is not profitable like Amazon's AWS, it is growing at a breakneck speed. In the previous quarter, Alibaba saw its cloud revenue grow by over 93% YoY, from 1.3 billion to 2.3 billion RMB (US $359 million). Average revenue per user is growing as well. Each paying customer generated 2,405 yuan ($355) during Q1 2018, compared with 2,154 yuan ($323) in the same quarter previous year.
And, while the cloud is still not operationally profitable it has significantly reduced its losses. Adjusted EBITDA for the segment improved from negative 13% to negative 4%. In addition, the cloud segment also reached another key milestone. Paying customers grew by 137,000 from the previous quarter, taking the total number of paying customers over the million mark.
Alibaba is not looking for its cloud computing segment to become profitable in the immediate future, instead, its is planning to double down on top line growth. "We are not looking at profitability as the near term goal. For now, our goal is to keep expanding our market leadership and therefore we will continue to make investments and develop that for rapid expansion," Ethan Yu, general manager of Alibaba Cloud Global had told CNBC last November. The company has global ambitions for its cloud segment.
Alibaba has been ramping up investment in the cloud, building new data centers. The company has been growing its global footprint, particularly in the Asia-Pacific market. Alibaba opened two new data centers in India and Indonesia. Last November it had announced plans to open data centers in Dubai, Tokyo, Germany and Sydney. While the company is investing heavily in fixed costs, Alibaba is hoping to gain from the operating leverage in future, just like AWS. While the cloud segment has been growing, it still accounts for just 5% of Alibaba's overall revenues. The segment still has huge growth potential. According to the IDC, spending on total cloud infrastructure (public and private), is projected to grow at 13% CAGR to reach $60 billion by 2020. Expanding cloud offerings will also help Alibaba to diversify revenue sources and capitalize on the growing XaaS (Anything-as-a-Service) market.
Neil Campling of Northern Trust Capital Markets believes that similar to how AWS is driving Amazon's valuations higher, Alicloud will also drive Alibaba's profits and valuation. "Baba keep drip feeding price cuts to entice more business, more partners, higher penetration which then maintains high growth and reinvestment in scaling out solutions. And as this scale occurs so the high original sunk fixed cost enables the companies to add-on higher value add services and new solutions ... which ramps profitability." he wrote in a note.
Alibaba has strong fundamentals.
Alibaba's cloud business will continue to grow at rapid pace in the coming quarters, driving Alibaba's revenue growth. However, eCommerce segment will remain the mainstay which is also growing at a rapid pace despite its huge size. The eCommerce segment has grown above 40% in all of the last five quarters. And this strong growth is likely to sustain in the coming quarters.
Apart from being a fast-growing company, Alibaba is also a very profitable company in the eCommerce and retail space. Alibaba has a net margin of 28% and operating margin of 32%. The company also generates tons of free cash flows. Given the growth prospects and strong fundamentals, Alibaba stock remains a good buy.
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