Alibaba Group Holding: Still the World’s Most Powerful Cloud

Speculators sell shares in Alibaba Group Holding (NASDAQ:BABA) because Trump hates China. Investors like Dan Loeb of Third Point buy Alibaba stock because they like China’s e-commerce market growth.  As our Josh Enomoto writes, it’s a play on the Chinese consumer.

Alibaba Group (BABA) headquarters sign located in Hangzhou China
Source: Kevin Chen Photography / Shutterstock.com

But the reason I think you should buy Alibaba is the same as I gave over a year ago. Alibaba is the world’s most powerful cloud. It represents what is possible when a cloud owner makes their cloud everything it can possibly be.

Better Than Amazon

Beyond running its own store and media operations, Amazon.Com (NASDAQ:AMZN) sells its cloud. It’s a landlord. It’s good being a landlord. Alphabet (NASDAQ:GOOGL) is trying to be a landlord.

Microsoft (NASDAQ:MSFT) does more with its cloud. Microsoft Azure is a platform, for both its own software and that of others. This is true for Apple (NASDAQ:AAPL) as well.

Facebook (NASDAQ:FB), the smallest of the cloud czars, uses its infrastructure solely for its own social media applications. Its business model is based entirely on advertising.

Alibaba has none of these limitations.

Alibaba creates applications that can run the entire business of a supplier. Alibaba’s cloud has made its Ant Financial bigger than most banks. Alibaba’s cloud doesn’t just buy and sell, and it’s not just rented out. It controls the companies who do business on it. It’s like IBM (NYSE:IBM) was in the 1950s, and what Salesforce.com (NYSE:CRM) is today.

That’s why Alibaba’s cloud continues to grow rapidly. The company plans to spend $28 billion on it over the next three years. In the race to the clouds the biggest cloud wins.

Alibaba is the world’s most profitable cloud. Its gross profit in fiscal 2020, which ended back in March, represented 44.5% of its revenue. Take out the research and other expenses, and operating income was 18% of revenue. That revenue, $71.86 billion, was 28% higher than the year before.

Those who argue that Facebook is more profitable ignore the fact that Facebook has run out of new things it can do. Alibaba, by contrast, is moving into health, global fashion, and electric cars.  Alibaba’s ambitions are unlimited.

Danger Ahead?

Not everything Alibaba touches reaches its goals. Alibaba’s media operations are still not profitable. China’s new “digital Yuan” is said to be aimed directly at Alibaba, raising the profile of China’s banks. Alibaba’s Lazada Group in Singapore is struggling.

As tensions between China and the rest of the world ramp up, Alibaba is in the crosshairs. India wants founder Jack Ma in court over censorship. American companies see the India-China tension as an opportunity.  Alibaba has had to conduct layoffs there for political reasons.

But these are nothing like the problems facing America’s cloud czars. Alibaba is increasing its dominance in Africa’s e-commerce. It’s recruiting 100,000 digital influencers in Europe. It’s undercutting Amazon there, and small merchants are flocking to its AliExpress platform.

Bottom Line on Alibaba Stock

Any pullback in Alibaba stock is a buying opportunity. 

At its Aug. 10 price of about $250, Alibaba is selling for under 10 times revenue. That sounds expensive, but many U.S. cloud players are selling for much more.

Alibaba is also doing more than U.S. cloud companies to unlock shareholder value. The new Chinese model is to offer stock in spin-offs, like Ant and Xpeng, the car company. This lets China’s cloud emperors dominate many types of business U.S. cloud operators won’t go near.

By the end of 2020 I think Alibaba will be worth more than Facebook, which it currently trails by $70 billion. Its cloud opportunities are just that powerful. While America’s government dumps on its cloud czars, China’s hails its cloud emperors.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, AAPL, MSFT, and BABA.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/alibaba-group-holding-still-the-worlds-most-powerful-cloud/.

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