Alibaba: Cloud Service Will Likely Drive Its Revenue Growth (NYSE:BABA)

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Summary

With the volatile political climate in China and the recent drop in tech stocks, we expect Alibaba Group Holding Limited to see its valuations decline further.
Due to the intense competition in Chinese e-commerce and slowing market conditions, BABA reported its slowest growth rate in FQ3'22 since 2014.
Despite the deceleration in revenue growth, BABA will still record a CAGR of 15.09% over the next two years, with impressive net incomes of over $22B.
We expect its Alibaba Cloud service to be a potential revenue driver in the future, given the massive global market value of $947.3B by 2026.
The current dip could be a good entry point for aggressive investors with a high tolerance for volatility.

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Investment Thesis

Alibaba Group Holding Limited (NYSE:BABA) has lost more than 28.5% of its value in the past six months, mainly attributed to China's volatile political climate and the recent slide for tech stocks. In addition, BABA expects a deceleration in revenue growth moving forward, due to the intense competition in the Chinese e-commerce market. Nonetheless, the company is still expected to grow at a CAGR of 15.09% over the next two years, while recording impressive revenues and net income of over $130B and $22B, respectively.

BABA also experienced record-breaking growth for its Alibaba Cloud, recording a CAGR of 76.38% in the past two years. We expect more to subscribe to its service, given the early stages of industrial digitalization in China and globally. With a global market value of $947.3B by 2026, we expect BABA's Cloud computing to match its Chinese e-commerce segment as a significant revenue driver moving forward.

While the current dip in stock prices presents a buying opportunity for aggressive investors, we expect a further retracement in its stock prices, given the current market sentiment. As a result, we recommend adding only if interested investors have a high tolerance for volatility.

BABA's Cloud Services Might Be A Potential Cash Cow In The Future

BABA Cloud Revenue and Cloud Operating Income

In FY2021, BABA reported $9.17B of revenues for its Alibaba Cloud services, representing an impressive 62.5% YoY growth. In addition, the company reported excellent growth for its Alibaba Cloud services at $3.07B of sales in FQ3'22, representing an increase of 23.2% YoY. Its growth was mainly attributed to robust demand from the financial services and the telecom sectors, offsetting softening demand from the Internet sector. As of FQ3'22, Alibaba Cloud's revenues from non-Internet industries accounted for 52% of its customers, indicating an increasingly diversified application base. Assuming a similar growth trajectory from the last twelve months, BABA may expect sustained revenue growth for its Cloud service segment at a CAGR of 40.92% moving forward.

In the last twelve months, its Cloud services only account for 8.5% of BABA's total revenue. However, we expect this number to grow, given the early stage of industrial digitalization in China and globally. By diversifying its revenue stream, the company would be better insulated against the volatile market conditions surrounding its e-commerce segment, given its massive revenue contribution at 71% as for FQ3'22. BABA also estimates a cloud computing market size of $158.27B in China by 2025, with current penetration rates at less than 7% of the market share. As a result, as more industries realize the benefit of data-driven services in the rapidly transforming digital world, we expect BABA's Cloud computing to become a significant revenue driver in the future, just like its Chinese e-commerce segment.

BABA's Cloud computing was put to the test through the recent Beijing Winter Olympics. Its services enabled the International Olympics Committee to integrate all of its key systems into the Alibaba Cloud, thereby removing the need for traditional physical IT infrastructure for the games planning and operations. In addition to reducing hardware costs, migration significantly increases deployment efficiency. Moving forward, BABA reported that digitization would be widely available in multiple sectors, including next-generation electric vehicles, financial services, and healthcare.

Cloud Services Revenues

Due to the sudden global lockdowns caused by the COVID-19 pandemic, we observed a skyrocketing demand for cloud solutions and services worldwide. These have benefited the cloud providers, seeing that their revenues have increased exponentially since FY2019. Currently, global Cloud services are dominated by Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) (GOOGL). These three companies commanded $149.16B of revenue in the last twelve months, accounting for easily 30% of the global cloud computing market share. Both Amazon and Microsoft enjoyed a CAGR of over 30% in the past two years, with Google recording an increase of over 40%. BABA also experienced record-breaking growth for its Alibaba Cloud, recording 76.38% in the same period. Most of this growth is attributed to the robust demand from the IT, telecom, BFSI, and media and entertainment sector.

With the global cloud computing market expected to grow from $445.3B in 2021 to $947.3B in 2026, at a CAGR of 16.3%, it is evident that BABA has plenty of room for growth given its current market penetration globally. The company has also been aggressively expanding its global presence through multiple international infrastructures, providing cloud computing services in 25 regions globally, recently in Korea and Thailand.

BABA Has Effectively Captured Most Of Its Audience In China

BABA Revenue and Net Income

Over the past five years, BABA had recorded massive revenue growth at a CAGR of 52.58%. or FQ3'22, the company reported revenues of $38.17B, representing an impressive increase of 22.6% QoQ and 12.6% YoY. Its net income also grew by 380% QoQ, though declining 73.4% YoY and 56.8% from FQ3'20 levels. As a result of missing consensus estimates of $38.9B and decline in net income, BABA's stock valuation continues to fall to its new low of $105.42, since hitting peak prices of $309.84 in October 2020.

Nonetheless, BABA reported that its global Annual Active Consumers (AAC) in FQ3'22 has grown by 43M to approximately 1.28B since FQ3'21. It comprises of 2.7% growth for its China base and 5.6% outside of China. By the end of FY2022, BABA also expects to reach 1B of Chinese AAC, effectively capturing covering all Chinese consumers with purchasing power. As a result, BABA intended to shift its strategy from acquiring new users to retaining them and growing the average annual spend per AAC (ARPU). Moving forward, we may expect to see BABA grow its Chinese e-commerce revenues from its higher spending AACs.

So, Is BABA Stock A Buy, Sell, or Hold?

BABA Projected Revenue and Net Income

Over the next two years, BABA is expected to report an apparent deceleration of revenue growth at a CAGR of 15.09%. Nonetheless, for FY2022, consensus estimates that BABA will report revenues of $136.1B, representing an excellent increase of 24.3% YoY. However, its net income is expected to decline by -1.2% from FY2021 levels, though still impressive at $22.7B.

BABA is currently trading at an EV/NTM Revenue of 1.71x, lower than its 3Y mean of 5.24x. Additionally, consensus estimates BABA stock to be attractive now, given its money-making potential and reasonable valuation. Therefore, aggressive investors might choose to add speculative positions if they have an appetite for volatility.

Due to a massive tech crackdown from the Chinese government, BABA's stock has lost over 28.5% of its value in the past six months. We also expect BABA to suffer further retracement before regaining some strength in the possible future. In addition, the tech stock market has turned mostly bearish in recent months due to inflation and the situation in Ukraine. Therefore, despite BABA's solid past performance, we urge patience for conservative investors until there is more clarity on China's stance on Big Tech firms.

Therefore, we rate BABA stock as a Buy only for aggressive investors.

This article was written by

Juxtaposed Ideas

8.93K Followers

I am a full-time analyst interested in a wide range of stocks. With my unique insights and knowledge, I hope to provide other investors with a contrasting view of my portfolio, given my particular background.Prior to Seeking Alpha, I worked as a professionally trained architect in a private architecture practice, with a focus on public and healthcare projects. My qualifications include:- Qualified Person with the Board of Architects, Singapore.- Master's in Architecture from the National University of Singapore.- Bachelor in Arts from the National University of Singapore.If you have any questions, feel free to reach out to me via a direct message on Seeking Alpha or leave a comment on one of my articles.

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