Why an Asia-wide cloud expansion could lift Alibaba's share price

The cloud business of Chinese tech giant Alibaba [BABA] has pledged to invest $1bn in talent and startups across the Asia Pacific region. But why, and what will it mean for Alibaba and the company’s stock?

Alibaba (CEO Daniel Zhang, pictured) has had a rocky first half of 2021. The Alibaba share price was down 8.7% year-to-date through 18 June, falling 22.6% from its intraday high of $274.29 on 16 February. As of 18 June, Alibaba was trading 3.9% above its 52-week low of $204.39, which it fell to during trading on 13 May. The stock was also down 33.5% from its 52-week high of $319.32, which it peaked at on 27 October 2020.

The share price of Alibaba has underperformed the iShares MSCI China ETF [MCHI] in the year to date (through 18 June), which had the company as its second-biggest holding with a 12.69% weighting on 18 June. The ETF had a year-to-date daily total return of -0.82% on 21 June, Yahoo Finance data shows. Meanwhile, the iShares China Large-Cap ETF [FXI], which assigned Alibaba’s share price an 9.08% weighting on 18 June, had a return of -1.45%.

The poor share price performance from Alibaba is largely down to shareholders losing faith and confidence in the stock. Back in April, the company announced it had been fined RMB18.2bn ($2.82bn) following an antitrust investigation that concluded the e-commerce company had abused its position as a market leader. It was alleged that merchants selling through the site had to do so exclusively, eliminating competition. 

  

The fine led to Alibaba reporting its first quarterly loss in the fourth quarter of 2021 since going public in 2014. Net income was RMB7.65bn ($1.2bn) versus a profit of RMB348m ($54m) in the year-ago quarter.

 

Asia-wide expansion

Despite the loss, Alibaba’s revenue for the full fiscal year 2021 increased 35% year-over-year to RMB509.7bn ($79bn), with 62% growth in its Alibaba Cloud business. The segment saw its revenue for 2020 rise to RMB40bn ($6.2bn). The third quarter was also the first time it turned a profit.

Alibaba Cloud outperformed both Amazon [AMZN] Web Services and Google [GOOGL] Cloud. The former saw its revenue grow 29.5% in fiscal 2020 and the latter 47%. As well as being China’s biggest cloud provider, Alibaba Cloud is the market leader across the whole of the Asia Pacific region.

  

Alibaba has been expanding its footprint in the region in recent months. The company has plans to open its first data centre in the Philippines before the year is out, while it will also be opening an innovation centre in Malaysia. As part of its commitment to the region, Alibaba announced at its Cloud Summit, held earlier in June, that it would be investing $1bn over the next three years in 100,000 developers and 100,000 technology startups.

Known as Project AsiaForward, the pledge could be seen as Alibaba trying to tidy up its image following its run-in with antitrust regulators, while growing its business outside mainland China. It comes at the same time as the US Senate passed a $250bn bill to boost domestic technology and give the country a competitive edge over China — a move the Chinese government has decried as being “full of Cold War mentality”.

 

Singapore sling

Though it may just be a coincidence, a number of Chinese tech giants have been shifting both their focus away from their domestic market and operations away from the US in recent months. Within the last year, both Alibaba and Tencent [0700.HK] have been acquiring office space in Singapore, with plans to make the island city their Asia hub. Alibaba also recently led a $400m investment in the retail arm of Vietnamese giant Masan — its first foray into the country.

Commenting on Alibaba’s antitrust controversy, in a note to clients seen by Barron’s, Citigroup analysts led by Alicia Yap wrote: “The conclusion of investigation and BABA’s decision to waive its right to appeal, or hold a public hearing, suggest that the company wants to move forward to rebuilding business operation.”

“The conclusion of investigation and BABA’s decision to waive its right to appeal, or hold a public hearing, suggest that the company wants to move forward to rebuilding business operation” - Alicia Yap

 

With both the Chinese and US governments likely to introduce new measures in the months ahead, there will likely be a further clampdown on big tech. Nevertheless, as far as Jackson Wong of Amber Hill Capital is concerned, Alibaba and Tencent remain top technology stocks in China.

“At this point, I can’t see any other stocks that can challenge their position,” Wong told CNBC’s ‘Street Signs Asia’ in April.