By Emily Bary
Analyst says spending plan could double Cloud's contribution to Alibaba's overall revenue, have 'ripple impact' across the sector for years
Alibaba Group Holding Ltd. plans to bolster its cloud business as the new coronavirus outbreak drives increased demand for online services.
The Chinese e-commerce giant announced Monday a three-year RMB200 billion (about $28 billion) investment in its cloud operations as the company aims to help businesses accelerate their adoption of digital services amid the COVID-19 pandemic. The investments will focus on Alibaba's (9988.HK) cloud operating system, servers, chips and network.
"The COVID-19 pandemic has posed additional stress on the overall economy across sectors, but it also steers us to put more focus on the digital economy," Jeff Zhang, the president of Alibaba's Cloud Intelligence unit, said in a statement. He said Alibaba's cloud investments will "help businesses speed up the recovery process, and offer cloud-based intelligent solutions to support their digital transformation in the post-pandemic world."
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Wedbush analyst Daniel Ives called the investment "a major strategic move" that he expects will "have a ripple impact across the cloud software/hardware sector for the coming years" as more companies leverage Alibaba's cloud technology.
Ives wrote that the company's increased cloud spending could help it fend off competition from JD.com Inc. (JD), Tencent Holdings Ltd. (0700.HK), and Baidu Inc. (K3SD.SG) while also making the cloud business a greater portion of its overall revenue.
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"We note while Alibaba has seen strong growth on cloud over the past year (60%+ growth), this business represents less than 10% of overall revenues and we believe could double over the next few years as the China cloud story continues to ramp significantly," Ives said in a note to clients. "With Amazon (AMZN) and Microsoft (MSFT) in a global two horse race owning the cloud market, Alibaba is making both an offensive and defensive move with today's cloud announcement in our opinion."
Overall, he expects an acceleration of global cloud spending as the COVID-19 pandemic dramatically alters daily life. While businesses and consumers may lean on video-conferencing software and other remote tools to stay connected, Ives said that ultimately it is cloud companies like Alibaba, Microsoft Corp., Amazon.com Inc. and Alphabet Inc. (GOOGL) (GOOGL) that power these technologies.
Read: Amazon Web Services sees stronger competitors, but believes it will still rule the cloud ()
Alibaba shares were up 2.5% in morning trading Monday. They've lost 5.5% over the past three months as the KraneShares CSI China Internet ETF (KWEB) has declined 8.7% and as the S&P 500 has fallen 15%.
-Emily Bary; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
April 20, 2020 10:26 ET (14:26 GMT)
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