I’ve written repeatedly about the long-term opportunity Alibaba (NYSE: BABA) presents for growth investors. So far in 2020, there have been multiple developments that have added to the Alibaba stock bull case. In fact, Alibaba recently announced a massive new investment in its cloud services business.
Alibaba is already the dominant player in China eCommerce. The new investment will help ensure its high-growth, high-margin cloud services business will also remain the gold standard in the world’s largest emerging market economy.
Alibaba will continue to put up growth numbers that will dwarf those of its U.S. big tech counterparts, including Amazon (NASDAQ: AMZN). The opportunity to scoop up Alibaba stock on the 2020 dip may not last for long.
The Cloud and Alibaba Stock
On April 20, Alibaba announced it will be investing $28 billion in its cloud computing division over the next three years. Alibaba said the spending will be focused on infrastructure, such as operating systems, networks and servers.
As with the eCommerce market, Alibaba already has more than 50% market share of the Chinese cloud computing market. However, this investment is a clear sign the company is serious about maintaining its lead over competitors such as JD.com (NASDAQ: JD) and Baidu (NYSE: BIDU).
Wedbush Securities analyst Daniel Ives says Covid-19 has accelerated an already rapidly-growing global cloud services market.
“We note while Alibaba has seen strong growth on cloud over the past year (60%+ growth), this business represents less than 10% of overall revenues and we believe could double over the next few years as the China cloud story continues to ramp significantly,” Ives wrote.
Ives says an accelerated ramp in Chinese cloud demand is a golden opportunity for Alibaba stock. The company is clearly pursuing that opportunity aggressively.
“We believe this coronavirus pandemic is a key turning point in the technology world around deploying cloud-driven environments as our long-standing projections of moving from 33% of workloads in the cloud to 55% by 2022 now look conservative as these targets could be reached a full year ahead of expectations,” Ives said.
Alibaba Unjustly Punished
While much of the global economy has been ravaged by the outbreak, a handful of businesses have thrived. Cloud services and eCommerce have gotten huge boosts in business due to the shelter-in-home environment. Fortunately, Alibaba is a major player in both of these businesses in China. In fact, CNBC’s Jim Cramer recently named BABA stock among a handful of stay-at-home stocks he’s recommending at the moment, calling it a must-buy.
Alibaba is seemingly following the Amazon playbook in China, shifting from a largely eCommerce business to cloud services. All of Alibaba’s businesses are thriving in the current environment. But you wouldn’t know it by looking at BABA stock. Amazon shares are up 26% in 2020, and understandably so. Alibaba shares are down 4.5%.
Part of the problem is likely the recent fraud admissions by Chinese companies Luckin Coffee (NASDAQ: LK) and TAL Education (NYSE: TAL). Chinese streaming video giant iQiyi (NASDAQ: IQ) is also denying allegations of similar accounting shenanigans. Unfortunately for Alibaba stock investors, these headlines don’t help alleviate the poor reputation Chinese stocks have always had regarding financial transparency. For now, U.S. investors may be a bit spooked when it comes to investing in China.
Long-Term Opportunity
At the end of the day, it’s not Alibaba’s fault that other Chinese stocks are using sketchy accounting. Sure, there’s risk associated with investing in Chinese companies. But there’s an endless list of high-profile U.S. companies that have also cooked the books. If you think stocks like Amazon and Apple (NASDAQ: AAPL) are totally immune from fraud risk, you’re delusional.
In the December quarter, Alibaba reported 37.6% revenue growth and 57.5% net income growth. It’s clear Alibaba’s business was firing on all cylinders prior to the outbreak. Evidence suggests its businesses likely got a boost from its fallout.
Alibaba stock is the best play on cloud computing and e-commerce in China today. The new $28 billion cloud investment demonstrates the company intends to stay that way.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long BABA.
