How Much Will Cloud Computing Contribute To Alibaba’s Top Line Growth?

by Trefis Team
Alibaba Group
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Alibaba (NYSE:BABA) has been a high-growth stock in recent years, with all revenue streams contributing meaningfully to overall top line growth. Cloud Computing has been a key contributor to the company’s revenue growth, with triple digit revenue increases in recent years. As a result, the contribution of Cloud Computing to Alibaba’s net revenues has increased from 1.7% of net revenues in FY’15 to 5.4% in FY’18. Over the next couple of years, we forecast Cloud Computing revenues to increase at over 60% annually to $5.7 billion by FY’20. In the same period we expect Alibaba’s net revenues to increase from $40 billion in FY’18 to almost $70 billion by FY’20. Consequently, the contribution of Cloud Computing should increase to over 8% of net revenues in the next couple of years. Accordingly, the segment is expected to contribute to around 12% of Alibaba’s overall revenue growth in the same period.

Alibaba has a sizable presence in the Infrastructure-as-a-Service (IaaS) market in China, with a nearly 48% share of the domestic market. In order to remain competitive with Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), Alibaba has invested heavily in cloud computing, which has started paying off handsomely in recent years. However, Alibaba still has a long way to go to grab the top spot in the IaaS market globally. According to Gartner, Alibaba’s share in the global IaaS market is around 3% as compared to 7% for Microsoft and 44% for Amazon’s AWS. Going forward, Alibaba intends to focus on international expansion. It recently added a new cloud data center in Indonesia, expanding its operations to 18 countries. We expect the company to sustain high growth in Cloud Computing in the coming years. We have summarized our expectations for Alibaba’s Cloud Computing revenue growth through FY’19 and FY’20 on an interactive dashboard for Alibaba’s Cloud Computing segment. Below we take a look at key revenue drivers for the cloud computing segment.

Factors Driving Segment Growth

Alibaba has reported consistent triple digit revenue growth in its Cloud Computing segment in recent years. Revenues have roughly doubled every year from $468 million in FY’16 to $968 million in FY’17 and further to $2.1 billion in FY’18. Revenue growth was attributable to both an increase in the total number of paying customers for Alibaba’s Cloud Computing offerings as well as the average revenue per customer. Alibaba reported a massive increase in the total number of paying customers from 263,000 in Q1’16  to 513,000 by Q4’16. This further increased to 874,000 by the end of Q4’17 and surpassed 1 million paying customers in June last year. It should be noted that we have taken an average of reported 4 quarters for annual average paying customers in our calculations. According to our estimates, the average annual paying customer count for FY’18 was around 1.2 million. We forecast this number to increase to 1.85 million by FY’20.

Similarly, the total spend per customer has increased from just under $1,270 in FY’16 to $1,350 in FY’17. This figure surged to almost $1,800 by FY’18, per Trefis estimates. We forecast this number to continue to increase rapidly to $2,600 through FY’19 and $3,000 in FY’20. As a result, we forecast total revenues from Cloud Computing to grow at a CAGR of 60-65% in the next couple of years. The growth rate is lower than the triple digit growth in recent years due to the large base factor. If you disagree with our forecasts, you can modify these figures on our interactive revenue contributor dashboard for Alibaba and come up with your own estimates. You can further use these figures in our valuation dashboard for Alibaba to calculate your fair price estimate for the company’s stock based on new estimates.

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