Alibaba (NYSE: BABA) had humble origins as a business to business marketplace, serving the Chinese market with a focus on helping domestic companies export abroad. It announced a $28.3 billion investment into cloud technology over the next three years with a focus on infrastructure.
This gives insight into where Alibaba sees future growth coming from. Like Amazon (Nasdaq: AMZN), it has had a meteoric rise from these humble beginnings and has grown vertically and horizontally.
Cloud Computing = Growth
One growth area for mega-cap, technology stocks is cloud computing. It has higher margins and faster growth than traditional e-commerce. Alibaba, Amazon, Microsoft (Nasdaq: MSFT), and Google (Nasdaq: GOOG) are leaders in this segment, as they had to develop their cloud computing systems to power their own companies' businesses.
Now, these systems are their business units are the major source of revenue growth and margin expansion for their companies. It's the primary factor behind these companies' strong stock market performance over the last couple of years and resilience during this downturn. Their massive size and resources also give them an advantage in winning market share.
It's also a great business in that the revenue model is subscriber-based. Additionally once a company switches to cloud computing, it quickly becomes a necessity for its customers, as it helps companies run cheaper and more efficiently. This means there are pricing power and high switching costs.
Alibaba's Move
This investment is about Alibaba's efforts to gain market share in the global market for cloud computing and protect its market share in the Chinese market. While Alibaba is the leader in cloud computing in China, it's far behind the U.S. tech giants globally and seeing more competition in the domestic market. In its last earnings report, third-quarter revenue for cloud computing came in at $1.5 billion which was a 60% increase from the previous year. However, it overall accounts for just 7% of the company's total revenue.
The investment is largely focused on chips, networks, and servers. The company cited the coronavirus pandemic as the impetus for the move as stresses grow in the real economy, but the digital economy keeps thriving. It's seeing more demand for its cloud services due to increases in video conferencing, live streaming, and content consumption.