Can Strong Cloud Growth Propel Alibaba's (BABA) Q3 Earnings?
Alibaba Group Holding Limited’s BABA expanding core commerce and cloud portfolio are expected to reflect on fiscal third-quarter results, slated to release on Feb 2.
The cloud business has fast emerged as a major contributor to top-line growth. Cloud computing has been emerging as a key technology to fight the battle against the coronavirus pandemic. This technology has been witnessing higher usage globally as it allows data interoperability in a scalable, cost-efficient way by data collection, processing, analyzing and sharing across platforms.
In the last reported quarter, revenues from the cloud computing segment increased 60% from the prior-year period to RMB14.9 billion (US$2.19 billion). Also, revenues from its core commerce segment were up 29% year over year to RMB130.9 billion (US$19.3 billion).
The Zacks Consensus Estimate for fiscal third-quarter cloud computing segment revenues is pegged at US$2.5 billion, indicating growth of 64.4% from the year-ago reported figure. Moreover, the consensus mark for core commerce revenues is pegged at $28 billion, indicating an improvement of 37.7% from the year-ago reported figure.
Click here to know how the company’s overall fiscal second-quarter results are expected to be.
Alibaba Group Holding Limited Price and Consensus
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Delving Deeper
Revenues from this segment have been impressive over the last few quarters. Sales growth is likely to have got a boost, driven by an increase in the number of paying customers and improved revenue mix of higher valued-added services.
During the quarter, Alibaba Cloud revamped its hybrid cloud strategy. The company upgraded product offerings and the Hybrid Cloud Partner Program in a bid to focus more on security, compliance and reliability. In addition, new appliances were launched to support cloud utilization needs of private enterprises.
In regard to this, Alibaba Cloud and LGMS — a leading cyber security consulting company — partnered to help enterprises boost their security capabilities. The partnership, aimed to help companies enhance their cyber security capabilities in a multi-cloud environment, will help Alibaba Cloud to expand presence in the cloud market.
Further, Alibaba Cloud partnered with Kumu, the livestreaming entertainment platform designed for Gen Z and millennial Filipinos. The deal will help Alibaba Cloud to expand the customer base.
Markedly, during the quarter, Alibaba, Farfetch and Richemont announced a global strategic partnership to provide luxury brands with enhanced access to the China market and accelerate the digitization of the global luxury industry. The deal will expand Alibaba’s reach in the in the e-commerce space.
These steps taken by the company, highlighting the growing importance of the cloud business, are likely to have boosted revenues in the quarter.
Innovation in data technology, widespread application of big data, and increasing validation for Taobao and Tmall portals are likely to have expanded revenues from the cloud computing segment in the to-be-reported quarter.
Alibaba rolled out a number of products based on the emerging technologies of Artificial Intelligence, Machine Learning and Internet of Things to cater to rising demand for cloud architecture, along with data analytics and security in the retail industry.
These products, which are expected to develop a collaborative management platform across various businesses, should have driven its revenues in the to-be-reported quarter.
Markedly, cloud revenues are expected to have increased in the quarter, owing to an increase in spending from enterprise customers. The company has been continually adding new features to cloud offerings for driving customer spending.
Its customer base expanded in the Asia-Pacific region, driven by portfolio strength. The expanding clientele is likely to have driven net sales of this segment in the quarter.
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 opened new data centers across the world. These factors are anticipated to reflect on its upcoming results.
Given the dominant position of Alibaba’s cloud business in China and aggressive international expansion strategies, cloud computing is expected to have been one of the major growth drivers in the quarter to be reported.
Zacks Rank & Stocks to Consider
Currently, Alibaba carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the broader technology sector include Semtech Corporation SMTC, Overstock.com, Inc. OSTK and Microchip Technology Incorporated MCHP, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Long-term earnings growth for Semtech, Overstock.com, and Microchip Technology is currently projected at 12.5%, 20% and 14.9%, respectively.
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