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Can Strong Cloud Growth Propel Alibaba's (BABA) Q3 Earnings?

Zacks Equity Research

Alibaba Group Holding Limited’s BABA expanding core commerce and cloud portfolio is expected to have performed well, which will likely be reflected when the company reports fiscal third-quarter 2018 results on Jan 30.

Alibaba’s cloud business has fast emerged as a major contributor to top-line growth.

In the last reported quarter, revenues in its core commerce segment were up 56% year over year to RMB72.5 billion (US$10.5 billion). Revenues from the cloud computing segment increased 90% from the prior-year quarter to RMB5.7 billion (US$825 million).

Click here to know how the company’s overall fiscal third-quarter performance is expected to be.

Let’s Delve Deeper

Alibaba’s core commerce segment comprises marketplaces operating in retail and wholesale commerce in China, and international commerce. Innovation in data technology, widespread application of big data, as well as increasing validation for Taobao and Tmall portals will continue to expand revenues in this segment.

The Cloud Computing segment, which comprises Alibaba Cloud offering a complete suite of cloud services, is in top gear. Management remains positive about the cloud computing business, as more and more businesses are shifting their servers and broadband subscriptions to cloud computing technology in order to streamline costs.

The company is considering cloud computing as a means to diversify business beyond retail. Revenues from this segment have been impressive over the past few quarters. Sales growth accelerated in the fiscal second quarter, driven by an increase in the number of paying customers and improved revenue mix of higher valued-added services.

Lately, Alibaba’s cloud computing business has been gaining a lot of traction. It is a dominant force in China, but has also gained traction in other regions. The company has opened new data centers across the world, particularly in Asia and Europe. Lately, it has also opened a data center in U.K. in a bid to expand the cloud business.

In addition, Alibaba has been introducing new products based on the emerging technology of Artificial Intelligence (AI), Machine Learning (ML), and Internet of Things (IoT) to cater to the rising demand for cloud architecture, along with data analytics and security in the retail industry.

These products assist the retail clients of the company to implement its “New Retail” concept in business operations.

Given the growing position of Alibaba’s cloud business in China and aggressive international expansion strategies, we believe that cloud computing will be one of the major growth drivers in the long run.

Alibaba Group Holding Limited Revenue (TTM)

 

Alibaba Group Holding Limited Revenue (TTM) | Alibaba Group Holding Limited Quote

Zacks Rank & Key Picks

Currently, Alibaba carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector are Twitter, Inc. TWTR, Cloudera, Inc. CLDR and Groupon GRPN. While Twitter and Cloudera sport a Zacks Rank #1 (Strong Buy), Groupon carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Twitter, Clouder and Groupon is currently pegged at 22.1%, 8% and 3%, respectively.

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