Cloud computing is becoming an increasingly important part of Alibaba Holdings Limited’s (BABA) business as the company takes a page from Amazon’s playbook of successful growth.
Cloud computing revenue for Alibaba grew an extraordinary 93% year-over-year, reaching $710 million in the past quarter.
The business segment has been strengthened this summer, as the company in June announced major cloud computing partnerships with Minsheng Bank, China Communications Construction Group, and InterContinental Hotels Group for major cloud migration contracts.
“Our cloud computing business continued its rapid growth over the past quarter,” CEO Daniel Zhang told analysts Thursday morning during the earnings presentation. “Alibaba Cloud launched more than 660 new products and features during the quarter, including a language-based document and analysis tools, hybrid disaster recovery for enterprises, and a big data analytical tools.”
He added that Chinese broadcasters chose to partner with Alibaba in order to stream the wildly popular FIFA world cup in the nation.
“I see China a lot like Amazon (AMZN) was four or five years ago, as some big names are increasing demand for cloud solutions,” Morningstar analyst R.J. Hottovy told Real Money in an interview. “It could be an important part of their story in the future.”
However, Hottovy was also quick to point out that the cloud computing segment is cost intensive, presenting a short-term drag on profits, leading to a $74 million net EBITA loss in the quarter on the segment overall.
“It’s going to take some investment,” he said. “But obviously it took some serious investment for Amazon to get where it is now.”
While stopping short of considering cloud computing as a future contributor to revenue on the scale of the business’ current e-commerce segment, he speculated it could reach up to about 10% of revenues for the business, about twice its current percentage.
He gives the stock a price target of $240, noting that it is undervalued by today’s market. Alibaba shares closed Thursday at $172.23, a decline of 3.2% for the day.
Speculating on reasons why it remains undervalued, he suggested the U.S.-China trade war and general economic concerns about China.
“It could be just general concern on China and trade wars,” he said. “But I think the company made a pretty good case this morning on why they’re protected from that.”