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China’s two tech giants, Alibaba Group Holding Limited (NYSE:BABA) and Tencent Holdings Limited (SEHK:700) have fought in many different fields, from online food delivery to mobile payments to internet advertising. So it’s perhaps unsurprising, and inevitable, that the two would take each other on in one of the most lucrative fields of all; the cloud.
The cloud is a global network of servers that provides services or shared resources over the Internet. It’s a big business globally. According to research firm Gartner, the worldwide public cloud service market amounted to US$182.4 billion in 2018. In 2022, that number is expected to reach as much as US$331.2 billion.
It’s also big business in China. According to the China Academy of Information and Communications Technology, the total cloud market in China soared to RMB 96.28 billion (US$13.97 billion) in 2018, up almost 40% from 2017. Of the total cloud market, China’s public cloud accounted for RMB 43.7 billion (US$6.34 billion) with private cloud accounting for the rest.
Alibaba leading but Tencent hot on its heels
Both Alibaba and Tencent have high hopes for the cloud. It’s so important to Alibaba that the company’s CEO Daniel Zhang once said that the cloud could be Alibaba’s main business in the future. Meanwhile, Tencent has invested millions of dollars into various businesses with the implicit understanding that those businesses will use Tencent Cloud and help recruit other companies to its cloud service.
In terms of their market position, though, Alibaba is the leader. As of March 31, the company had more than half the market in China. In 2018, in the Infrastructure as a Service (IaaS) segment of the cloud, Alibaba Cloud had 43% market share while Tencent had an 11.5% market share in 2018. Although that’s not much, Tencent has grown its market share considerably as it only had 7.4% of the IaaS market in 2016.
Although Alibaba has a “first mover” advantage that gives it enormous scale, Tencent has a competitive advantage in some fields such as video streaming and gaming cloud applications. Because Tencent is a gaming company itself, it has convinced 75% of its fellow gaming peers to use Tencent cloud. Tencent has also tried to cross-sell cloud security services and analytics to its WeChat customers to gain market share.
Alibaba Cloud’s financials
In terms of financials, Alibaba Cloud’s revenue rose 76% year-on-year to reach RMB 7.73 billion (US$1.15 billion) for the first three months ended 31 March 2019. Net loss for the cloud computing segment was RMB 1.036 billion (US$155 million) for that quarter as Alibaba invested as much as it needed to scale and capture market share.
Once Alibaba Cloud has enough scale, it could potentially be a profit powerhouse just like Amazon Web Services (AWS) is for Amazon. Alibaba has vast potential for growth as the company counts around half of China’s top 35 internet “unicorns”, with US$1 billion valuations or more, as customers. Alibaba Cloud is also used by more than half of China’s A-listed companies.
In terms of analyst expectations, Alibaba Cloud is expected to continue to grow at a fast rate. For the last fiscal year, Alibaba’s cloud computing revenue was RMB 24.7 billion (US$3.68 billion). For next year, analysts estimate that Alibaba Cloud sales could reach US$8.72 billion. By comparison, analysts expect Amazon Web Services to bring in US$75.41 billion in 2020.
In terms of valuation, Alibaba Cloud has been valued at US$39 billion, or roughly 8.4% of Alibaba’s market valuation. If Alibaba Cloud continues to grow, the division could be worth a lot more to Alibaba shareholders over the long term.
Tencent Cloud’s financials
Although it hasn’t given exact financials for its cloud division, Tencent reported that its cloud business “sustained a rapid year-on-year revenue growth rate” for the first quarter due to enhanced and broader offerings.
Tencent reorganised its business last year to prioritise growth in cloud and fintech by putting them into one division dubbed “FinTech and Business Services”. That division, which includes Tencent Cloud and WeChat Pay, saw revenue rise 44% year-on-year to RMB 21.8 billion ($3.17 billion) for the first quarter of 2019.
Currently, Alibaba is the unquestioned leader in China’s cloud while Tencent is a distant second. Given their fast growth rates and the overall large market size though, I firmly believe that both Alibaba Cloud and Tencent Cloud could one day contribute meaningful profits to both of China’s internet giants given how early in the cloud services cycle they are.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.