Want Another Reason to Buy Alibaba Stock? Try the Cloud

Alibaba (BABA) made a name for itself as the Amazon.com (AMZN) of China thanks to its dominant e-commerce business. But like Amazon before it, part of the appeal of Alibaba stock is its potential in other areas of business. And a new report says the cloud will be its biggest source of growth.

The report by Morgan Stanley said that Alibaba stock could gain the most market share in the increasingly crowded cloud-computing market in the coming years.

The bank expects Alibaba’s cloud revenue from its AliCloud platform to reach $10 billion by 2021, 10 times last year’s $1 billion in cloud revenue. For perspective, that was 6.3% of the company’s total sales last year. In five years, AliCloud is expected to comprise 18% of BABA’s total sales.

AliCloud Key to Alibaba Stock Growth

With the company’s sales slowing the last few years—from 215% growth in 2012 to 56% growth in 2014 to 29% last year—an extra $9 billion tacked onto its top line over the next five years would be a game changer. It’s just a report, and it’s based largely on Morgan Stanley’s theory that the cloud “is a transformational technology like electricity” and that its usage should broaden in the coming years. If that’s the case, then cloud stocks like BABA are “widely undervalued today,” the report said.

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So, add that to the long list of catalysts for a stock that’s already up 41% in the last year, including a 25% run-up since late December. Alibaba stock took a hit in 2015 when the Chinese stock market went belly up, falling as low as 57 in September of that year. In the 18 months since, it has nearly doubled.

Meanwhile, Alibaba’s sales and earnings are projected to perk up again this year: Analysts anticipate 54% top-line growth, which would be the highest in three years, and 43% earnings-per-share growth. And those numbers don’t include much help from AliCloud, which is actually expected to decrease (to 4%) as a percentage of sales this year before really taking flight starting in 2018.

Given its dominance in China’s e-commerce market, Alibaba stock was already a strong long-term investment candidate for any portfolio. Our Paul Goodwin has been recommending BABA stock in his Cabot Global Stocks Explorer advisory for years, and recently added the stock to his portfolio again after it hit a rough patch. It’s already up 6% in the two months since he bought it, and Paul currently rates BABA a Buy.

BABA = AMZN 15 Years Ago

It’s easy to see why. Now that Alibaba, like Amazon before it, is transforming into something much more than an online marketplace, it could be just scratching the surface of its immense potential. The AliCloud will be a huge part of that transformation.

Fifteen years ago, AMZN was merely a place where people could go online and buy books, CDs and electronics. Then it launched Amazon Web Services in 2002, and the stock took off, tripling within a year. In 2010, the company started producing original content for online streaming; AMZN stock has risen nearly eight-fold since.

With AliCloud, Alibaba stock has that kind of growth potential.

Chris Preston

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Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.

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