Alibaba Group Holding’s cloud services business will turn a profit for the first time this year thanks to work-from-home demand driven by the coronavirus pandemic, according to Daniel Zhang, the group’s chairman and chief executive.
He made the announcement during an investor briefing on Wednesday, hours ahead of Alibaba’s annual general meeting where Jack Ma, Zhang’s predecessor, will officially exit the board of the company he started in a small Hangzhou apartment in 1999.
As China’s largest e-commerce group, Alibaba’s platforms handled transactions that accounted for 18% of the nation’s total retail sales for the year ended in June.
Under the leadership of Zhang, a former accountant, Alibaba has embarked on a multiple growth engine strategy which is seeing the group expanding deeper into new sectors, including cloud services, logistics, entertainment, electric vehicles, and real estate.
Such new business takes eight to ten years to mature, according to Zhang, highlighting the potential of cloud services in particular.
While Alibaba still is hugely profitable in its core e-commerce business thanks to the rapid rise of Chinese consumers’ spending power over the past ten years, cloud computing is expected to be the next gold mine for decades.
Alibaba, which has a user base of more than 1 billion and enjoys ample cash flow, is well positioned to tap into that market.
“The immediate opportunity in front of us is enterprises’ migration to cloud,” he said, explaining that more companies are moving their operations online because of the pandemic. “Digital collaboration has become a new normal. I believe that this new normal is here to stay even after we fully recover from the pandemic.”
Danny Law, an analyst with Guotai Junan International, also credited the pandemic’s effects for helping Alibaba Cloud to reach profitability earlier than he expected.
“It is commonly known that Alibaba’s cloud business can make [a] profit anytime. It just depends on when it decides to monetize [the business],” Law said. He previously expected the business to still be recording a loss this year due to its reinvestment to gain market share.
“We view that the cloud business still has huge room to grow on the back of strong demand for digitalization from different industries, such as online education, online health care, livestreaming, among others,” he said.
In the 12 months to June, cloud computing revenue grew 60% from a year before to 45 billion yuan (USD 6.6 billion), contributing about 8% of total group revenue. The loss for the segment narrowed to 342 million yuan in the March to June quarter from 358 million yuan a year earlier. Alibaba’s current fiscal year will end in March 2021.
Alibaba Cloud held a leading 42.4% share of China’s cloud market in the quarter from January to March, according to materials presented to investors on Tuesday. For the wider Asia-Pacific region, its share rose last year to 28.2% from 26.1% a year before, while its global share reached 9.1%.
Alibaba said in April that it will invest an additional 200 billion yuan into its cloud-computing division over the next three years.
“There is going to be tremendous innovation in cloud-based services,” said Jeffrey Towson, a private equity investor and former professor at Peking University. “These are the early days of this fight.”
Alibaba is not the only company that sees opportunities, Towson said. “Outside of e-commerce and retail, there are lots of serious competitors in China, such as Tencent, Baidu, and Huawei.”
Alibaba Cloud focuses on e-commerce and financial services. But at the most ambitious level, Towson said, cloud services would provide intelligent digital services and data technology for Chinese and Asian businesses far beyond e-commerce. “This could be everything from transportation in Malaysia to banking in South Korea,” he said.
However, the service’s prospects have been hit by worsening US-China relations, as the administration of President Donald Trump has urged American companies to stop using cloud storage services provided by Chinese companies, including Alibaba and Tencent Holdings.
Alibaba also expects its logistics service Cainiao, founded in 2013, to achieve positive operating cash flow this fiscal year. Cainiao’s revenue grew 45% over the 12 months ended in June from a year earlier and accounted for 5% of group revenue.
Together with affiliate Ant Group, which is pursuing an initial public offering in Shanghai and Hong Kong, Alibaba has reached 1.07 billion customers over the past two decades, Zhang said. With an eye toward further growth beyond China, Zhang said the company aims to double its user base to 2 billion globally by 2036.
“No matter how the geopolitical landscape changes and how the international relations evolve. . . collaboration is the only way to drive higher efficiency and strong synergy,” Zhang said. “Globalization will always be one of our important growth engines going forward and is a course to which we remain firmly committed.”