Alibaba Group Holding (NYSE:BABA) has seen its shares get hit hard over the past month. They’ve dropped some 17% in value since the end of October. However, the company is performing very well in 2020. Before the slide, BABA stock had posted 66% growth on the year.
Since then, Alibaba shares have been hurt by the dual threats of being delisted from U.S. exchanges and scrutiny from the Chinese government.
However, assuming the company is able to navigate these regulatory hurdles, Alibaba is looking great. And it’s on track to keep posting growth with its cloud investment finally shifting into the black.
Alibaba’s Bet on the Cloud Is Paying Off
Like American tech giants, Alibaba has been investing heavily in cloud computing. Data centers are expensive to bring online and operate, and competition in the industry is fierce. In September, the company announced that investment is beginning to pay off.
The company’s CFO told CNBC that the cloud computing division will become profitable for the first time in this current fiscal year. CEO Daniel Zang called cloud computing a “growth engine” for his company, describing it as “the kind of opportunity that comes only once in a generation.”
This is a big deal with considerable long-term upside for BABA stock.
When Alibaba released September quarter earnings results last month, cloud computing was spiked out again:
… cloud computing revenue grew 60% year-over- year, driven by the acceleration in digitalization across all industries and businesses of all sizes in China. We are happy to see that our strategic investments are starting to see improving operational efficiencies and the effect of scale.
Cloud revenue was $2.19 billion for the quarter, up 60% year-over-year. In addition Alibaba drew attention to its success in signing up clients:
As of September 30, 2020, approximately 60% of A-share listed companies are customers of Alibaba Cloud, and their average spending grew 45% year-over-year in September 2020.
The global cloud computing market is expected to be worth $371.4 billion 2020. That’s huge, but it is also growing rapidly. Projections have that market hitting $832.1 billion in 2025. That’s a CAGR of 17.5%.
But it gets better for Alibaba investors. The Asia Pacific market is expected to see the most growth during that time, outpacing North America. And the country within that area projected to lead the way in cloud computing growth? China. Alibaba’s home turf.
U.S. and Chinese Governments Ramp Up the Pressure
Alibaba is seeing significant growth across all its business units, including its core e-commerce business. The biggest risk associated with this company lies in the current tension between the American and Chinese governments.
Legislation voted on in the House will force Chinese stocks listed on U.S. exchanges to comply with a yearly audit by American regulators. If passed, this would give Alibaba and other Chinese stocks three years to comply, or they would be forced off U.S. stock markets. In addition, the Chinese government is stepping up antitrust scrutiny of internet-based companies like Alibaba.
These actions have been a drag on BABA stock, especially over the past month.
Bottom Line on BABA Stock
Investment analysts love Alibaba — perhaps even more than I do. It’s a company that has a large following, and an overwhelmingly positive one. The Wall Street Journal is tracking 54 analysts who cover BABA. Two holdouts have a “hold” rating on the stock. Three have it rated as “overweight” and 49 rate it as a “buy.”
Here’s the bottom line on BABA stock. There is some risk involved, especially from the Holding Foreign Companies Accountable Act. So in Portfolio Grader, BABA gets a “B” rating. However, the vast majority of investment analysts agree with my view: the risk is worth it.
Alibaba is an e-commerce powerhouse and a growing cloud computing player. If you’re searching for a company that has enormous long-term growth potential, BABA is well worth investing in.
On the date of publication, Louis Navellier had a long position in BABA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
