Think the 56% advance Alibaba Group Holding Ltd (NYSE:BABA) shares have dished out over the course of the past 12 months means BABA stock has no more room to run?
Wells Fargo analyst Ken Sena doesn’t agree. He thinks Alibaba is worth another 20% thanks to cloud computing potential most other analysts — and investors — just don’t see. He said as much on Thursday when he reiterated his “Outperform” opinion but upped his price target on BABA stock from $230 to $250.
For some stocks, such augmented optimism would be tough to digest. But for Alibaba, Sena’s raised target isn’t crazy at all.
What He Said
It’s a largely overlooked facet of Alibaba, which is most often likened to Amazon.com, Inc. (NASDAQ:AMZN) because of its e-commerce presence. But, much like its U.S. counterpart, Alibaba is also wading ever deeper into cloud computing waters.
That arm is still a tiny part of the company’s revenue mix, to be clear. Though cloud revenue grew a little more than 100% year-over-year last quarter, that was still only about $550 million in revenue. BABA has generated a total of $36 billion in revenue for the past four reported quarters.
Then again, the company only recently got started in the cloud computing business.
That’s the underpinnings for Wells Fargo’s growing optimism. Sena, in attendance at Alibaba’s Cloud Computing Conference held in Shanghai earlier this month, was blown away by AliCloud’s “current leadership, pace of innovation, and potential to drive margin improvement.”
That margin improvement won’t unfurl immediately, however. Sena also conceded that the company’s rapid growth pace within its cloud computing arm will likely shave 250 basis points off margins in the near term. Sena also said that profit crimp will improve over time as Alibaba grows its cloud scale and figures out how to make the venture more efficient.
That’s the theory anyway. Any chance it could actually work out as well as expected?
A Serious Contender
To answer the not-entirely-rhetorical question, yes, Alibaba is a serious cloud contender. And given enough time, cloud computing could provide a measurable boost to the value of BABA stock. Indeed, if anything, the market may well be underestimating the opportunity at hand even as it overestimates how quickly the company will be able to penetrate it.
Through 2016, IT-research and consulting outfit Gartner pegged Amazon as the dominant player of the infrastructure as a service (IaaS) market — “cloud,” in layman’s terms.
Microsoft Corporation (NASDAQ:MSFT) and Google also registered but just barely. And, between those three powerhouses, it seemed unlikely another player would even be able to step foot into the arena. And that’s still the case, more or less, in terms of naming the companies that can and do define the industry.
Last year, however, a new name showed up on the “Visionary” part of Gartner’s analysis — a place where up-and-comers are acknowledged. Alibaba showed up, surpassing two other visionary-level providers that have a head start.
It’s a start, though Alibaba is hardly finished. Earlier this month the company added SAP software to its list of compatible platforms, opening the door to a whole new segment of the cloud market. The company is also leveraging its cloud technologies to become a leader of the artificial intelligence market.
Perhaps more alarming to existing and would-be cloud computing service providers: AliCloud is moving west. It operates two data centers in the United States, one in Europe and one in the Middle East. It has plans for more expansion outside of China, too, even though its primary focus here and now is China.
Up for grabs is a piece of China’s mostly underserved cloud computing market expected to be worth around $100 billion by 2020. Also up for grabs is a piece of the global cloud computing market that could be worth more than $550 billion by the same time. That’s enough opportunity to lead Sena to think cloud computing will account for 10% of Alibaba’s revenue within five years, up from only 5% now.
Bottom Line for BABA Stock
There are some headwinds, to be sure. As West Gate Networks’ President & Lead Network Architect Andrew Froehlich recently opined, “current demand for cloud services within its home country is greater than any other country,” perhaps putting the kibosh on Alibaba’s suggested expansion plans.
Froehlich also notes that Alibaba may lack the number of cloud-certified employees it needs to convince a prospect to become a paying customer.
Nevertheless, that’s something that can (and likely will) change going forward, as Alibaba gets better at managing and growing its cloud revenue.
It’s not a reason to buy BABA stock in and of itself. But, in light of the rising tide and Alibaba’s capacity to shake things up with innovation, it’s quickly becoming another reason to own Alibaba shares. In that light, Wells Fargo’s Ken Sena has good reason to up the ante by upping his price target.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.