Tech

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

How far can the euphoria over Alibaba Group Holding Ltd. go? 

Even by the standards of online retail, its rise has been extraordinary. Revenue has grown by an average 52 percent annually over the past five years. Its 158 billion yuan ($23 billion) of sales in the 12 months through March was more than 10 times the 2011 figure.

Far from slowing down as it grows, Alibaba appears to be keeping up the pace: Revenue will increase 45 percent to 49 percent in its 2018 fiscal year, the company said at its investor day Thursday.

Into Orbit
Alibaba's revenue growth shows little signs of slowing
Source: Bloomberg, company reports

That's most impressive when you consider how dominant Alibaba already is. It's easiest to increase revenue from a low market-share base, but the Chinese e-commerce company is already little short of a monopoly.

If you think Amazon.com Inc.'s 43 percent share of U.S. online sales is extraordinary, consider this: Sales through Alibaba's online marketplaces have been hovering around 70 percent of the national total for several years now, and rose to 80 percent in its most recent fiscal year, according to Gadfly's calculations.

Monopoly Money
Four out of five dollars spent online in China go through Alibaba's marketplaces
Source: Company reports; National Bureau of Statistics of China; Gadfly calculations
Note: Based on Alibaba gross merchandise volumes as share of online retail sales of goods and services. Alibaba stopped reporting quarterly GMV in the September 2016 quarter; the March 2017 figure represents an annual total.

That scale of dominance still suggests the kernel of a problem, though. Any seller of consumer goods must eventually contend with the law of big numbers: The larger you get, the harder it is to keep growing.

Luckily Alibaba recognizes this, and is putting its considerable cash flows to work in finding the next leg of growth. While its core e-commerce business makes up more than 82 percent of sales, Alibaba is following the Amazon playbook by using that money to help fund a much larger business. Analysts seem to be underestimating the potential there.

Take Alibaba's cloud business -- technology that allows companies to churn through time-and-resource sucking computing tasks at faster speeds and relatively low costs. Fourth-quarter revenue from the cloud business and international commerce came in 4 percent and 23 percent higher than consensus, according to . But whereas analysts raised their forecasts for the international business by 12 percent, expectations for the cloud business remain unchanged, the firm said.

In the Cloud
Revenue from Alibaba's cloud business is growing at twice the rate of its core e-commerce
Source: Bloomberg

Sure, growth has been slowing and there are plenty of formidable global competitors out there, but the unit is expanding at almost twice the rate of Alibaba's core e-commerce business, reaching almost $1 billion last year from just $63 million in 2012. And China Renaissance Securities U.S. Inc. thinks the Cloud unit could become a $5.3 billion business by 2020, roughly the size of Yahoo! Inc. 

It was the emergence of Amazon's cloud business that converted all the non-believers on that stock. Breaking out figures for the business back in 2015 was the catalyst that transformed investors' perception of Amazon and sent its shares from $300 in 2015 to more than $1,000 today.

Big Break
Shares in Amazon spiked after breaking out figures of its cloud computing business
Source: Bloomberg

Alibaba never faced the same challenges Amazon did of convincing the public markets that it had promise, since its 2014 IPO came well after the world finally accepted the fact that online shopping represented the future of retail. Indeed, the stock hasn't had a sell rating since 2015 among the 51 analysts that follow it, and has more than doubled since its IPO. 

That's a formidable track record, but there's no reason to suspect the company can't justify it. The share price is currently just 31 times blended forward 12-month earnings, after Thursday's 13 percent surge. That compares with more than 68 times at Amazon, and there's 91 billion yuan of net cash sitting on the balance sheet for further investment.

Alibaba has come a long way. It's not even started to run out of steam.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net