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Can Strong Cloud Growth Propel Alibaba's (BABA) Q4 Earnings?

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Alibaba Group Holding Limited’s (BABA - Free Report) expanding core commerce and cloud portfolio are expected to have performed well in the fiscal fourth quarter. This will likely be reflected when the company reports fiscal fourth-quarter 2019 results on May 15.

Alibaba’s cloud business has fast emerged as a major contributor to top-line growth.

In the last reported quarter, revenues from its core commerce segment were up 40% year over year to RMB102.8 billion (US$14.96 billion). Revenues from the cloud computing segment also increased 84% from the prior-year quarter to RMB6.61 billion (US$962 million).

Click here to know how the company’s overall fiscal fourth-quarter performance is expected to be.

Let’s Delve Deeper

Alibaba’s core commerce segment comprises marketplaces operating in retail and wholesale commerce in China, and international commerce. Innovation in data technology, widespread application of big data, as well as increasing validation for Taobao and Tmall portals will likely boost revenues from this segment in the to-be-reported quarter and beyond.

The Cloud Computing segment, which comprises Alibaba Cloud offering a complete suite of cloud services, is in top gear. Management remains positive about the cloud computing business, as more and more businesses are shifting their servers and broadband subscriptions to cloud computing technology in order to streamline costs.

Revenues from this segment have been impressive over the last few quarters. Sales growth should accelerate in the fiscal fourth quarter, driven by an increase in the number of paying customers and improved revenue mix of higher valued-added services.

In addition, cloud revenues should increase in the quarter, owing to a boost in spending from enterprise customers. The company has been continually adding new features to cloud offerings for driving customer spending. During the quarter, Alibaba Cloud launched many products and features that should increase its adoption among customers and drive revenues from this segment.

Lately, Alibaba’s cloud computing business has been gaining a lot of traction. It is a dominant force in China but has also gained traction in other regions. The company has opened new data centers across the world. At the end of January, Alibaba launched its second data center in Japan.

Alibaba has been introducing new products based on the emerging technology of Artificial Intelligence (AI), Machine Learning (ML) and Internet of Things (IoT) to cater to the rising demand for cloud architecture, along with data analytics and security in the retail industry.

These products assist the retail clients of the company to implement the “New Retail” concept in business operations.

Given the growing position of Alibaba’s cloud business in China and aggressive international expansion strategies, we believe that cloud computing will be one of the major growth drivers in the quarter to be reported.

Zacks Rank & Key Picks

Currently, Alibaba carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector include Facebook, Inc. FB, Shopify Inc. SHOP and AXT, Inc. AXTI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth for Facebook, Shopify and AXT is currently projected at 20.2%, 23.7% and 15%, respectively.

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