Alibaba Cloud Arm Set for Centerstage as E-Commerce Plateaus

(Bloomberg) -- It's not the e-commerce business that'll command the most attention when Alibaba Group Holding Ltd. posts earnings Wednesday. It's the nascent cloud computing division that investors will scrutinize instead.

China's largest internet company reports just a week before Katy Perry and other stars headline a launch party for the annual Singles' Day online shopping extravaganza. Yet it's the less flashy internet-based computing unit that's in the spotlight now that its e-commerce juggernaut is plateauing and the payoff from nascent businesses such as entertainment remains years away.

Taking Amazon.com Inc.'s approach, Alibaba has placed cloud at the heart of its global expansion, eyeing top share in Japan in two years and beefing up its presence from the Middle East to the U.S. It already hosts more than a third of China's websites. The company's fastest-growing division probably helped power 53 percent growth in group revenue to 33.9 billion yuan ($5 billion) last quarter, according to estimates compiled by Bloomberg. And unlike other businesses such as video streaming or on-demand services, it may be close to contributing to the bottom line. 

“People have really high expectations for the cloud unit,” said Billy Leung, an analyst at Haitong International Securities Co. “For me, it's already in the books, in the share price.”

Shares of Alibaba have surged 24 percent this year compared with a rise of just 2.7 percent for the NYSE Composite Index.

Alibaba has only recently begun to make inroads beyond China and into a global cloud market dominated by Amazon and Microsoft Corp. It's the biggest provider of internet-based computing -- everything from storage and data analysis to server hosting -- for government agencies and corporations within its home market, but abroad it's more narrowly focused on supporting Chinese-based organizations on foreign soil. The division now accounts for less than 5 percent of Alibaba's revenue, the lion's share of which comes from an e-commerce division still growing at double-digit rates.

But that proportion is climbing steadily and could help the company grapple with a profusion of difficulties facing the wider economy. Chinese gross domestic product grew 6.7 percent in the third quarter, its slowest pace of expansion since 2009. 

“One of the key focuses this quarter will be Alibaba's cloud unit performance,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Services LLP who expects the unit's revenue to soar 130 percent to 1.49 billion yuan. “If Alibaba's cloud unit breaks even this quarter, that would be a confidence booster for investors.”

Like Amazon's, Alibaba's cloud service emerged from the enormous computational power needed to handle millions of online shopping transactions. But unlike its U.S. counterpart, it enjoys home-field advantage in a vast Chinese market where web-based computing is still novel to many enterprises. 

Its push into cloud, where software and services are provided to customers via server farms the size of football fields, prompted a second data center in Silicon Valley and preparation for its first in Europe. Along the way, Alibaba forged partnerships with industry giants like Intel Corp. and Nvidia Corp. In July, the division's president proclaimed it could match or even surpass Amazon within three to four years.

Alibaba co-founder Jack Ma once referred to data as the new oil. Chief Executive Officer Daniel Zhang said last month that cloud computing will underpin the upgrading of China's $4 trillion retail market, one of the company's biggest opportunities. He envisions building a system that monitors in-store sales as they happen, giving retailers and brands the ability to adjust in real time.

If that happens, the cloud could well become one of Alibaba's bigger profit centers. Amazon Web Services earned $861 million of operating income last quarter, by far the U.S. company's most lucrative division.

Alibaba said in August that the unit was close to breaking even, driven by some 577,000 paying customers. Overall, Alibaba is expected to post 7 billion yuan of net income, a 69 percent drop propelled in part by the integration of loss-making online video streaming business Youku Tudou and Lazada Group SA, acquired earlier this year.

Cloud is “the next revenue driver,” Credit Suisse analysts Evan Zhou and Monica Chen wrote in a note last week, tagging its growth for the September quarter at about 147 percent.

To contact the reporter on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net. To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan