Alibaba Cloud – Growth and Margin Engine
$Alibaba(BABA.US$ Aside from the continued secular growth in e-commerce space, a big part of BABA's future is dependent on Alibaba Cloud. It's somewhat different to AWS within $Amazon(AMZN.US$ which contributes c.80% of operating profit and 30% of revenue, as Alibaba Cloud is still in its early stage. The revenue is expected to cross the $10bn mark this year and overall the business still requires substantial investment. It is also noteworthy that Alibaba Cloud is now the third largest hyperscaler globally, outpacing GCP with higher growth and more adoption.
Alibaba Cloud has been securing dominance, especially in China and APAC region, for a long time. Although the business started as the direct copycat of AWS, Alibaba Cloud, much like Taobao and Alipay, has evolved into a comprehensive IaaS+SaaS platform with highly effective deployment service for clients.
Unlike the U.S. market where DevOps and cutting edge architecture are proliferated among high-quality software engineers, Asian markets have more enterprises relying on legacy IT infrastructure without the talent pool to execute on the digital transformation in-house. Alibaba Cloud, DingTalk and the deployment service, could help clients not only build modern applications with the power of IaaS but also deploy and use SaaS more effectively. For example, a client could start by shifting to DingTalk to organize the work, and then either build custom apps connected to DingTalk or procure certified SaaS apps on DingTalk marketplace. As more applications are built, Alibaba Cloud could get better at cross-selling its IaaS products and enjoy the tailwind.
This is part of BABA's effort to nurture the ecosystem of modernized application development and improve the ground for IaaS and SaaS. I believe IaaS and SaaS are the destined future globally in order to improve productivity further and deliver growth for the economy. With common prosperity, we shall expect more middle-sized enterprises to emerge in China, which will be a great tailwind for Alibaba Cloud as well.
Considering the potential of IaaS and SaaS combined, I believe Alibaba Cloud could at least reach the scale of 1/2 the AWS and the best case is a SaaS platform like $Salesforce(CRM.US$ plus AWS. Talking on the terminal margin profile, SaaS is inherently profitable with 75%+ contribution margin. IaaS is more tricky as BABA is actively promoting its products at heavy discounts compared to AWS whose contribution margin is at 50%+.
Therefore, over the long term, I believe Alibaba Cloud has a high chance to grow into the size of 300bn+ market capitalization. Furthermore, growth of IaaS and SaaS should be able to help BABA to reach the terminal FCF margin at 30%+ once the business is mature.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
Bull Bull 1 : I am in this boat too, but I am worried about mohnish pabrai jumping out of the boat. Do you have any insights? Charlie Munger still in the boat as I know...
lover most Bull Bull 1 : Personally, I am not much of a follower. Last time I followed someone, I loss a small fortunate. Then from that day onwards, I swear I will never follow anyone into a stock I don't understand.
Mohnish Pabrai is more of a follower. He likes to buy what others are buying. As for why he sold out? Your guess is as good as mine. But I guess is that it's for tax reasons.
show u my money Bull Bull 1 : Pabrai sold at 148. He could sold 10% higher few weeks later. Dont worry about amateurs, sell at high not at low…
Hotbuns show u my money : I don't want to sell but I am scratching my heads as why he sold, he seems so bullish in all the interview he did on china and Alibaba.
12 Invest Hotbuns : As much as I like Mohnish Pabrai he doesn't really have a track record. His rates of return are DURING the largest bull market ever. Real investors do well over LONG periods (including bear markets). Look to people like Munger and Buffet if you want to see real innovators.
Amy carry Hotbuns : Munger hasn’t made a buy in 6 years so him buying this is saying something.
Ponew Hotbuns : most likely explanation is external pressure
102684170 : Ali is still a good company