Alibabarecently held a virtual investor day event and said the pandemic is having an even-more positive impact on the company’s high-growth cloud business than investors had previously anticipated.
The health crisis has had a profound impact on the economy on a sector-by-sector basis. However, one universal theme that has played out in 2020 is that the crisis is speeding up the digitization of the global economy. Alibaba is the biggest player in e-commerce and cloud services in the biggest emerging market economy in the world. If the pandemic has fast-forwarded a global economic revolution, BABA stock is clearly a major winner as the company is literally profiting from the pandemic.
BABA Stock Buoyed by Profitable Cloud Business
The key headline from Alibaba investor day is that the company is anticipating its first profit from its cloud computing business in the current fiscal year. In other words, Alibaba’s cloud will be profitable by March 31, 2021.
Alibaba’s cloud business has been one of its highest-growth segments. CEO Daniel Zhang has also said it will ultimately be Alibaba’s “main business.”
In the most recent quarter, Alibaba reported $1.75 billion in cloud revenue, up 58.5% overall. The business now accounts for 8% of the company’s total revenue.
Chinese giant Alibaba is often compared to Amazon (NASDAQ:AMZN) because of its focus on e-commerce and cloud services. In the most recent quarter, Amazon’s AWS cloud business grew its revenue by just 29%.
For better or worse, Alibaba seems to be doing its best to follow Amazon’s blueprint in China. Alibaba has also been beefing up its logistics business. Investors got some good news on that front as well. At the investor day event, Alibaba said its Cainiao logistics arm will be operating cash flow-positive this fiscal year.
Entering ‘Harvest Phase’
Several Wall Street analysts have weighed in on BABA stock since the investor day event. Citigroup analyst Alicia Yap said Alibaba’s AliCloud and Cainiao businesses are entering the “harvest phase” after years of heavy investment. That news should reassure investors that other recent Alibaba investments will ultimately pay off as well.
“In light of behavioral changes of consumers and businesses in a post pandemic environment, and thanks to Ali’s vision of digitization in the past 20 years, we believe the company is well placed (at the right time) to capitalize on the upside opportunities of digitization of many traditional industries, global trade, global logistic capability,” Yap wrote in a recent note to clients.
Citigroup has a buy rating and $318 price target for BABA stock.
Bank of America analyst Eddie Leung said AliCloud profits should also increase over time as customers ramp up their usage.
“As the core China retail marketplaces see steady growth off a large base, some developing [businesses] start to yield fruit thanks to their enabler role for clients and previous investment in tech and biz infrastructure. The pandemic has accelerated the pace of digitalization in consumers’ daily life and enterprises’ operation,” Leung said.
Bank of America has a buy rating and $343 target for BABA stock.
I’m a big bull on long-term growth in China, e-commerce and cloud services in general. I’ve been a BABA stock investor since 2016 because it hits all these major growth themes.
The trade war and geopolitical uncertainties have been a major headwind for BABA stock in the past two years. In fact, despite comparable growth numbers and businesses, Amazon’s stock is up more than twice as much as Alibaba’s shares this year.
Once the election dust settles in the U.S., investors will shift their focus away from the trade war and back to the numbers. A Biden win would be a best-case scenario for BABA stock given how Trump has made China trade a centerpiece of his administration. However, it’s likely that even a re-elected Trump would dial down the anti-China rhetoric after the election is over.
Last quarter, Alibaba reported 33.7% revenue growth and a 121.6% net income increase. Yet somehow, BABA stock trades at a forward earnings multiple less than 25x.
Alibaba has the growth numbers. It has an attractive valuation. It has near-term and long-term catalysts. And now it has a profitable cloud business. Long-term investors who buy BABA stock will be glad they did.
On the date of publication, Wayne Duggan held a long position in BABA.
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. He 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.