When discussing the fast-growing cloud computing market, Amazon.com, Inc. (AMZN) and Microsoft Corporation (MSFT), which respectively hold the number one and number two spots in market share, are not alone anymore. The emergence of Alibaba Group Holding Limited (BABA) suggests that it should be taken seriously.
Alibaba entered 2017 with a goal of challenging both Amazon and Microsoft for cloud dominance. To that end, it has taken a strong first step. Last week, the Chinese e-commerce giant posted a 54% jump in quarterly revenue, driven by the company's cloud momentum, which delivered a 115% year-over-year increase in revenue to RMB1.76 billion ($254 million). The company's paying customers are growing at an impressive rate. At the same time, Alibaba is finding ways to get these customers to pay more. (See also: Assessing Alibaba's Cloud Prospects for 2017.)
However, there's still a question as to how well Alibaba's cloud strategy is working. The company hasn't made the cloud a priority in terms of profit potential. Instead, Alibaba has looked on the cloud business, Alicloud, as a way to create better diversification in its revenue streams and bring better synergies among its portfolio of investments. In other words, the growth in Alicloud should help boost and in some cases offset any weakness seen in offline retail or media assets.
In its third quarter earnings results, reported last week, Alicloud generated $254 million in revenue, marking 115% year-over-year growth. By contrast, in the most recent quarter, revenue in Amazon's AWS reached $3.23 billion, rising 55% year over year. Amazon will report results for the fourth quarter on Feb. 2. Meanwhile, Microsoft's commercial cloud revenue, reported last week, just surpassed $14 billion. This includes Office 365 and the Azure cloud platform—analysts estimate Azure revenue at around $3 billion. (See also: Microsoft Stock Among Top Cloud Picks for 2017.)
Plus, unlike AWS and Azure, Alicloud continues to operate at a loss. This explains why analysts haven't celebrated the company's gaudy numbers in the cloud, which accounts for about 4% Alibaba's total revenue. Still, with Alibaba looking to expand Alicloud beyond China, revenue growth will likely begin to accelerate. As such, Wall Street will be forced to take notice. Likewise, Microsoft and Amazon shouldn't underestimate Alicloud's potential. (See also: Alibaba Stock Rises on Q3 Revenue, EPS Beat.)