Alibaba’s dominant cloud business could take on Amazon

Chinese e-commerce giant Alibaba (BABA) reported stellar fiscal first-quarter earnings on Thursday propelled by revenues that spiked 59%, surging past Wall Street estimates. And while talk of e-commerce transactions soaring on mobile dominated the announcement, analysts also paid close attention to the company’s cloud computing business, Alibaba Cloud — and for good reason.

Founded in 2009, Alibaba Cloud has evolved into China’s dominant cloud computing services provider, offering clients including Dutch electronics giant Philips, Schneider Electric and marketing platform Blogmint a wide range of storage, security, and database management options. For its fiscal first quarter, the company reported Alibaba Cloud revenues swelled 156% year-over-year to $188 million with 577,000 paid users.

Analysts who follow the company closely expect Alibaba Cloud to become a key growth driver in the medium- to long-term.

“AliCloud is massively underestimated in our view,” wrote Oppenheimer internet analyst Jason Helfstein in a July report. China’s cloud industry is on the brink of massive growth, with Alibaba Cloud best positioned to reap the benefits, he added. In fact, Helfstein expects Alibaba Cloud’s revenues will grow 112% annually — more than the Street’s estimates of 82% — growing from just 3% of Alibaba’s overall annual revenues currently to 18% by 2020.

One of Alibaba Cloud’s greatest advantages remains its China roots, which have enabled Alibaba Cloud to rapidly grow locally in ways foreign competition such as Amazon Web Services and Microsoft Azure could not, due to China’s data sovereignty and cyber-security laws.

More challenging will be growth in the US, where Amazon Web Services in particular is virtually synonymous with “cloud computing” and which Morgan Stanley values at $91 billion. (Alibaba Cloud, meanwhile, is valued by the firm at $39 billion.)

To that end, Alibaba Cloud has made deals with graphics chipmaker Nvidia (NVDA) to use its silicon for crunching certain tasks faster, as well as HTC to help power the Taiwanese company’s VIVE virtual reality headset. And in July, the cloud services provider appointed former Microsoft scientist Jingren Zhou as chief scientist to lead research around A.I. and big data.

Alibaba chief financial officer Maggie Wu said on the Thursday the company would spend aggressively on Alibaba Cloud’s expansion efforts, and in turn, be in the red, until such time when the cloud services provider amasses one million paid customers.

“One million is a pretty good point of customer base,” added Wu. “At that point, profitability will start to show.”

Disclosure: Yahoo Finance parent Yahoo owns shares in Alibaba.

JP Mangalindan is a senior correspondent for Yahoo Finance covering the intersection of tech and business.

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