Alibaba Group Holdings Inc. (BABA), the e-commerce giant known as the "Amazon of China," is poised for explosive growth and set to become a dominant player in cloud-computing services, a league currently dominated by Google parent Alphabet Inc. (GOOGL), Inc. (AMZN), and Microsoft Corp. (MSFT). And a new study by Forrester predicts the company’s cloud unit will surpass Google Cloud next year as the third biggest competitor in the global cloud market, according to a recent story in Business Insider

Alibaba, with a market cap of $484 billion, currently dominates the online retail market in China, the world’s second largest economy and most populous country with around 1.4 billion people. The expected rapid pace of growth of the e-commerce company will not only put it ahead of Google in the market for cloud services, but will put it into direct competition for global customers with Amazon and Microsoft.

“When we say that Alibaba is threatening Google for the third post, we believe in 2020 Alibaba will make more money than Google will,” Forrester’s vice president and principal analyst Dave Bartoletti told Business Insider. 

Key Takeaways

  • Alibaba’s cloud unit predicted to surpass Google Cloud next year.
  • China is a massive market and demand for cloud services is rising.
  • Alibaba is becoming more innovative as it partners with big firms.
  • Recent secondary offering will help to finance further growth.

What It Means for Investors

The Forrester report predicts that Alibaba’s cloud infrastructure unit, first formed in 2009, will bring in $4.5 billion in revenue next year. While Google’s reported annual revenue run rate for its cloud business is $8 billion, that figure is a combination of revenue from both its cloud infrastructure unit and its G Suite productivity software. Solely based on infrastructure, Alibaba is expected to replace Google as the third most dominant player in global cloud services.

Alibaba has not always been the most innovative of big tech companies and has propelled itself forward by largely being adept at imitating the innovations of its competitors. However, things may be starting to change. “Nowadays, innovation is happening everywhere in the China market, and Alibaba Cloud has become one of the most important platforms to support business-driven innovation, especially based on the Internet,” vice president of Canon Ehara Taisei told Barron’s in September.

But regardless, one of the major sources of Alibaba’s strength is its dominance in the biggest marketplace in the world—China. The company raked in total revenues of more than $56 billion in its most recent fiscal year and comprises about two-thirds of the online-retail market share in China. When it comes to cloud computing, demand in China is only growing, and Alibaba is the household name for such services.

“They are the leading public cloud provider in China, which is a very big market,” said Bartoletti. “They have a lot of people using their services there. They are doing well financially. They have money to invest in build out. They are doing a good job of being a fast follower.”

While financially strong, another thing that will help Alibaba to invest in further growth is Alibaba’s latest round of share issuance for its secondary listing in Hong Kong next week. The secondary offering was oversubscribed with proceeds of the sale amounting to roughly $13 billion, a pile of cash that could help Alibaba grow its cloud business to Amazon-like proportions. 

Looking Ahead

But while Alibaba may be starting to shift its focus on the two frontrunners in the cloud space, Google won’t give up its third place spot without a fight. Google Cloud is likely to maintain its dominance with domestic customers as Alibaba has a much smaller presence in North America. Google could also gain ground if it shifts some of its attention to expanding abroad in European markets.