Why (BABA) Stock Isn’t a Cloud Computing Play in 2 Charts

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Alibaba Group Holding Ltd (NYSE:BABA) sent a clear message to BABA stock holders that cloud computing was going to be a huge part of the company’s fiscal future.

2 Charts That Say Alibaba, BABA Stock Isn't Yet a Cloud Computing PlayThe company certainly saw impressive growth with its cloud arm last quarter, reporting 96% year-over-year growth in its second quarter cloud computing, driven by a doubling of the number of cloud customers it boasts for the same twelve-month time frame. Given that kind of progress, it’s not tough to convince current and would-be owners of BABA stock that the cloud is going to be a very big deal going forward.

Yet, when you take a step back and really look at how insignificant cloud-computing still is to Alibaba’s top and bottom line, it’s also tough to imagine how and when this venture will make a meaningful difference in the company’s results.

A Long Way to Go

First things first: The mall thing. Though it’s been whispered for weeks now, Alibaba CEO Jack Ma confirmed a few days ago that it will be building a five-story mall in the city of Hangzhou. The mall’s stores will feature, among other things, Alibaba’s brand and services including a Hema supermarket.

It’s a newsworthy development to be sure, putting Alibaba’s cloud ambitions on the market’s backburner for the time being. BABA stock holders were by and large willing to score a cloud victory as a foregone conclusion and moving on. It might be worth a quick revisit of Alibaba’s reality, however, to figure out exactly how much work the company has to do on this front before cloud computing actually matters.

And two charts tell the story well.

The first chart compares Alibaba’s e-commerce revenue to all other sources of revenue.

Alibaba division revenue
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The second graphic features the profitability of the company’s various divisions and puts things in greater perspective. Alibaba’s cloud computing arm is not only still losing money, it doesn’t even appear to be making bottom line progress.

Alibaba income by division
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It’s not an encouraging picture.

And make no mistake, the market is treating BABA stock like it’s already the cloud success it says it wants to be. Northern Trust Capital Markets analyst Neil Campling recently reiterated his bullishness on Alibaba stock, suggesting its cloud computing operation’s growth trajectory mirrored that of Amazon.com, Inc. (NASDAQ:AMZN); he’s looking for a repeat of the AWS story and the subsequent bullish impact on the stock.

Maybe he’s right. Just bear in mind that Amazon launched its cloud business when the cloud was new and choices were limited. Alibaba’s competitors in China aren’t likely to let the company develop a strong lead the way rivals like Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) let Amazon gain when Amazon Web Services was young.

Looking Ahead for BABA Stock

Don’t read the wrong message. Alibaba doesn’t need cloud computing to survive, and the company is sure to see appreciable growth in its cloud revenue and cloud customer base. The distance between where its cloud business is and where too many investors have assumed it will be soon, though, is dangerously massive.

That won’t necessarily kill the rally. It won’t even begin to threaten to quell the bullishness until most investors realize how insignificant the company’s cloud venture is. Even then it won’t matter if traders choose not to care.

Still, there’s nothing more dangerous for a story stock like BABA than gains that aren’t actually supported by results. And, much of the rally BABA stock has enjoyed of late has been driven by hype rather than rationalized results.

If nothing else, put the possibility of disappointing cloud results on your radar.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/baba-stock-cloud-computing/.

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