The Motley Fool

1 China Cloud Stock That’s Near an All-Time High

Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) recently announced plans to spend RMB 200 billion (or US$28 billion) on its cloud division over the next three years.

By investing more, Alibaba hopes to narrow the gap between it and international cloud leaders such as Microsoft Corporation (NASDAQ: MSFT), Inc (NASDAQ: AMZN), and Google (NASDAQ: GOOGL), also known as Alphabet Inc.

Although Alibaba Cloud is growing fast, it still has quite a way to go to catch up with the leader. For instance, Alibaba’s cloud sales rose 62% year-on-year to around RMB 10.7 billion (US$1.5 billion) for the fourth quarter.

Yet leader Amazon’s cloud sales rose 33% year-on-year to US$10.2 billion for the first quarter of 2020.

Alibaba spending more isn’t just good news for its market share globally. It might also be good news for GDS Holdings Ltd (NASDAQ: GDS). Here’s why.

Data centre leader

 GDS is a leading operator and developer of data centres in China. As of the first quarter of 2020, GDS had a client base of 639 customers representing leading companies in financial services, large enterprises, and the internet and cloud.

Among its many customers include leading cloud and internet companies such as Alibaba, Tencent Holdings Ltd (SEHK: 700), Baidu Inc (NASDAQ: BIDU), and (NASDAQ: JD).

If Alibaba spends more on the cloud, its main competitor Tencent could also feel the need to spend more.

If other companies choose to spend more as well, GDS could potentially see more business overall (although it’s no guarantee at the moment).

Given the huge sum of investment committed by Alibaba, sentiment in the sector could also improve. More potential business and better potential sentiment is good news for any stock.

Great performance, fast growth

Many investors like GDS because it’s a growth stock with good execution.

For the first quarter of 2020, GDS sales rose 39.1% year-on-year to RMB1.24 billion and its adjusted EBITDA rose 49.3% year-on-year to RMB 572.1 million.

Management has also executed well in terms of its stock price. After debuting on the NASDAQ at US$10 per ADS in 2016, shares of the data centre company have rallied to around US$60.88 as of 14 May.

Despite Covid-19 disrupting many businesses around the world, shares of GDS have increased 18% year-to-date.

GDS management sees a lot more growth in the future. They commented on Alibaba’s plans and the growth forecast for the industry in its first quarter 2020 conference call:

“You may have seen reports that Alibaba plans to spend another RMB 200 billion or nearly US$30 billion on infrastructure in the next few years. Other cloud service providers are also reporting accelerated adoption.

Cloud in China is forecasted to grow at over 30% CAGR for the next five years. We estimated that this would require at least three times expansion of cloud datacenter capacity.”

Foolish conclusion

Alibaba committing to spend more money in the cloud could translate to strong demand for GDS in the long run. Given that the market is judging GDS on growth, strong future demand is good for its stock price.

Although GDS is riskier than many other stocks due to its volatility, the company also has a lot of potential given its secular growth if management executes.

Here's 1 China stock that's riding the long-term growth in a MASSIVE US$400 billion industry. Find out why we think this market is so exciting and how investors can benefit, right here.

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.