Should Investors Buy Alibaba Stock After Shares Rally?

October 1, 2020

Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) saw its shares soar 6.2% in New York trading with investors liking what they saw at the company’s Investor Day event.

Tim’s Take:

Alibaba isn’t any stranger to the big leagues. The “A” of the traditional Chinese tech triumvirate of BAT (remember Baidu?), the company can also be viewed as a “middle-aged” giant on China’s tech scene.

That hasn’t stopped it from innovating, though. Its latest Investor Day proved how fast-moving and big picture Alibaba remains despite Jack Ma’s departure, and now under the stewardship of CEO Daniel Zhang.

There were lots of initiatives announced at its latest Investor Day event – from monetising original content initiatives to building out its Southeast Asian e-commerce strategy and digitising its logistics capabilities.

However, what really caught my eye has what’s always been the big advantage Alibaba possesses over other China tech plays; the cloud.

The company’s commanding lead in the cloud in China has been established. The company had a 42.4% market share in China in 2019 for Public Cloud Service – which includes Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS).

Massive cloud growth in Asia

In Asia Pacific, for 2019 the company had 28.2% market share in Public Cloud IaaS, up from 26.1% the year before.

The growth of its cloud unit, AliCloud, is astounding. It notched up 59% year-on-year revenue growth in its latest quarter. Yet, even with that, AliCloud’s revenue of RMB 12.3 billion (US$1.81 billion) makes up just 8% of the group’s overall revenue.

The shift to the cloud in China is just starting and as the world’s second-largest economy, China remains a way behind the US in terms of investment (see chart below).

That is bound to change over the coming years and Alibaba is going to play a huge role in that transition.

China cloud spending

Source: Alibaba’s Investor Day presentation

Alibaba is a master of building sticky ecosystems and the fact that 60% of A-share listed companies in China are already AliCloud customers is proof of that. 

Add in its expansion into cloud services in Southeast Asia and the company is set to continue growing its cloud presence in a region that is fast digitising.

Often seen as the “Amazon of China”, Alibaba does have the e-commerce/cloud combination in common with its American counterpart. 

But for me, Alibaba’s cloud growth journey is just beginning. Investors who are in it for the long haul should view this Chinese giant as one of the key beneficiaries of the structural shift to the cloud.

Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.

This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.

This material is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CGS-CIMB’s clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this material. The information and opinions in this material are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, derivative contracts, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto. CGS-CIMB have not, and will not accept any obligation to check or ensure the adequacy, accuracy, completeness, reliability or fairness of any information and opinion contained in this material. CGS-CIMB shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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