Alibaba's Cloud Segment Is Red Hot

Alibaba's (NYSE: BABA) revenue has grown over 50% in each of the past eight quarters, mainly thanks to its core e-commerce businesses. But for fiscal year 2019, Alibaba said it expects its revenue to grow by a stunning 60%, with its cloud computing business and e-commerce business being the two biggest growth drivers.

Alibaba Cloud, started in 2009, is already the infrastructure-as-a-service (IaaS) market leader in China. And as more and more of the country's 1.4 billion people join the online world, investors will be watching to see how many quarters Alibaba's cloud segment can keep up its over 100% year-over-year growth rate.

Alibaba Cloud growth over the past three years

Alibaba's cloud segment has seen its revenue more than double year over year in 10 of the past 12 quarters. In the most recent quarter, it reported 103% growth to $699 million.

In the past four fiscal years, Alibaba Cloud's revenue has grown year over year by 64%, 138%, 121%, and 101%, respectively. For the year ended this past March, Alibaba Cloud's revenue hit $2.1 billion. In other words, Alibaba can let out a sigh of relief because investing in its cloud business over the past nine years is paying off for both the company and its investors.

As Alibaba Cloud's revenue has shot up over the past three years, its percentage of Alibaba's total revenue has grown from just 1% at the end of fiscal year 2015 to 5% for fiscal year 2018. If the cloud segment's revenue continues to jump by about 100% each quarter, it will soon replace its digital media and entertainment segment as the second biggest contributor to Alibaba's overall revenue. This past quarter, the entertainment segment's revenue grew just 34% year over year to $840 million, while Alibaba Cloud's revenue grew 103% to $699 million.

Each year, Alibaba has attributed its massive cloud revenue growth to two things: an increase in paying customers and increased spend from existing customers as Alibaba offers more expensive options each year. From fiscal year 2016 to fiscal year 2017, Alibaba Cloud's paying customers grew from 500,000 to 874,000. The last time Alibaba reported its paying customer total was for the quarter ended June 2017 when it had just over 1 million paying cloud users.

Alibaba Cloud ranked first in China, but third worldwide

Alibaba is currently the IaaS market leader in China, claiming 47.6% market share. But its new focus has been on international growth. This past quarter, Alibaba added a cloud data center in Indonesia, which brought its global cloud computing presence to a total of 18 countries and regions.

However, Alibaba is currently ranked as the third largest public cloud provider worldwide, behind Amazon.com (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT), according to research firm Gartner. Like Alibaba, Microsoft and Amazon both attributed a bulk of their revenue growth this past year to their respective cloud businesses.

This past quarter, Microsoft reported 16% growth in overall revenue, thanks to its Azure cloud business' 58% revenue growth to $6 billion. Meanwhile, Amazon reported 43% overall revenue growth, thanks to its AWS cloud unit sales growth of 49% year over year to $5.4 billion.

Both companies clearly trumped Alibaba Cloud's $699 million quarterly revenue. That's because although Alibaba Cloud is the number three worldwide IaaS provider, it has just 3% of the market, compared to AWS's 44.2% and Azure's 7.1%, according to Gartner estimates.

However, the good news for Alibaba investors is that Alibaba Cloud has been crushing Microsoft and Amazon in terms of revenue growth. Alibaba Cloud grew 104% this past quarter, while AWS grew 49% and Azure grew 58%. If Alibaba can keep up that kind of growth, it's going to inch closer to its top two rivals.

The good news for all three companies is that they have plenty of room to grow in a market that has room for multiple players. The global public cloud services market is expected to grow 21% in 2018 to $186.4 billion, according to Gartner. Within that market, the IaaS segment is expected to grow the fastest at 36% to $40.8 billion.

Alibaba has been quickly expanding its cloud segment since it launched in 2009. The company may be far behind Microsoft and Amazon, but it's in first place in its home country of China, the most populous country in the world, and its revenue growth puts it in a good position to slowly but steadily catch up to AWS and Azure.

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