Thread by @frankinvesting

Thread/ $BABA & the value Alibaba Cloud

Alibaba cloud is arguably the most bullish aspect of the $BABA thesis even though it’s <10% of FY21 total revenues and not yet profitable. Currently they have ~40% of cloud market share in China.

1/ The cloud market in China is only in early stages of development. They are approximately 5-6 years behind the US if they can replicate the same growth trends that a company like $AMZN has been able to achieve with AWS.

2/ the US and Chinese cloud market is very different and not a perfect comparison. But $AMZN & $BABA are the dominant players in each market so I will make some comparisons throughout the thread.

3/ Between 2010-2020 the cloud market had a ~30% CAGR. The global cloud computing market is expected to grow at a 17.5% CAGR until 2025. Being in early stages, the Chinese market theoretically should grow faster than the global market average.

4/ During the most recent earnings report from $BABA, cloud revenue grew 29% YoY. This was much lower than it could have been due to Covid-19 impacts and the Bytedance (Tik-Tok) contract. That 29% growth in a slow year is a good sign.

5/ In the second quarter of 2020, Alibaba cloud had an unprofitable -9% adjusted EBITDA margin. In the second quarter of 2021 it had a profitable 2% adjusted EBITDA margin.

6/ In comparison, For the three months ended June 2021, AWS contributed $14.8 billion in revenue and $4.2 billion in EBIT to Amazon (28% EBIT margin). Revenue growth of 37% & EBIT growth of 24%.

7/ over the past 5 years AWS has grown revenues at ~35% annually. IF Alibaba Cloud can grow revenues at even half that rate going forward it could become a meaningful part of $BABA total revenues.

8/ If we take a conservative growth rate of 20-25% over the next 5yrs than Alibaba Cloud FY26 revenue would reach between $22-27B (USD). Which is about 20% of LTM total revenues for $BABA.

9/ it would not be unlikely to see growth of 30% which would contribute ~$33B revenue towards $BABA. If they can achieve a conservative 20% EBIT margin (AWS ~28% EBIT margin), Alibaba Cloud could be worth approx $200B on its own in FY26 (30x EBIT multiple).

10/ I think it’s fair to say Alibaba cloud in FY26 will be worth between $100-200B USD which is approx. ~20-40% of the current $BABA market cap. If they match AWS growth and margins (unlikely, not impossible) it could be worth >$300B.

11/ ‘IF’ you believe the intrinsic value of the $BABA E-commerce business is worth more than the current market cap than you potentially could have a $200B cloud business for free + 1/3 of Ant Financial.

Disclosure: long $BABA