Alibaba Cloud's split and listing, how to support a valuation of 800 billion

Alibaba Cloud valuation geometry

After the most important organizational change in Alibaba's 24 years of existence, Alibaba Cloud has become the most thorough business segment of Alibaba's spin-off.

According to the previous financial report information, Alibaba Cloud's cloud intelligence group will achieve a complete spin-off, introduce external war investment represented by private equity funds, and form a new company completely independent of Alibaba Group in terms of equity and corporate governance.

This also means that this leading enterprise in the domestic cloud computing track will finally face the most direct scrutiny of the capital market. How to value Alibaba Cloud has become a curious question for many people.

At present, there is no cloud company similar to Alibaba Cloud independently listed in both domestic and international capital markets, so it is temporarily difficult for Alibaba Cloud to find suitable benchmark companies and estimate market value.

In February this year, after considering the growth rate and profitability, CITIC Securities quoted a valuation of about 200 billion yuan for Alibaba's cloud computing business with reference to the valuation of Amazon's AWS.

This figure is lower than many expected. Many investors who are optimistic about the prospects of Alibaba Cloud believe that this well-deserved leader in the domestic cloud computing track should be judged at a level of Amazon's AWS.

Therefore, these investors believe that its value should be estimated at a price-to-sales ratio of 8 to 10 times, and according to Alibaba Cloud's revenue of 77.2 billion last year, this figure will be up to 800 billion.

In fact, even for the value judgment of Amazon AWS, there is considerable disagreement in the industry. Some media reported that Goldman Sachs' valuation of AWS is in the range of $560 billion to $800 billion, while Morgan Stanley's analysts' judgment is $400 billion.

Why are valuations so different for cloud vendors? First of all, it is important to note that the cloud giants that exist today have all grown out of the business expansion needs of their parent companies. This means that they share fixed assets such as servers and data centers with their parent company. How to clarify the attribution of these high-value assets in the valuation process will determine the valuation amount to a considerable extent.

In addition, most estimates of a company's market capitalization refer to its future profitability. Considering EBITDA margin, Alibaba Cloud's EBITA margin has been below 5% in the past three years, and although this giant has always firmly controlled more than 30% of the domestic market, its actual profitability has been greatly reduced due to fierce industry competition.

With Alibaba Cloud's recent launch of a new round of price wars, the current industry landscape is once again confusing. But until the huge reshuffle really happens, Alibaba Cloud, which actively cut prices, is unlikely to give brighter profit data in the near future. This restricts the old rivers and lakes of the capital market to give higher expectations.

But in any case, Alibaba Cloud's decision to split up and go public independently has already caused widespread concern and speculation. Going public will increase Alibaba Cloud's independence and freedom, targeting a wider range of customer sources in the wave of new technologies such as large models.

How much room for imagination is left

"All industries, all applications, all software, and all services are worth redoing based on new artificial intelligence technology, based on AIGC's technical support in all aspects, and large model support."

At this year's Alibaba Cloud Summit, Daniel Zhang, as both CEO of Alibaba Cloud and Chairman of the Board of Alibaba Group, expressed his views on the current wave of big models and artificial intelligence:

"This will definitely bring not only an innovative customer experience, customer service satisfaction, but also a lot of changes in our production paradigm, work paradigm, and life paradigm."

According to the plan, Alibaba Cloud, as the main R&D and operation body of the big language model "Tongyi Qianwen", will continue to access all of Alibaba's products, empower other business segments after the spin-off, and comprehensively upgrade and transform products such as DingTalk, Tmall Genie, and Taobao.

This means that all segments of Alibaba Group will remain firm and stable large customers after Alibaba Cloud is independently listed. According to the financial report data, Alibaba Group's cost on Alibaba Cloud in fiscal 2023 was 24.74 billion yuan, while Alibaba Cloud Intelligence's total revenue in fiscal 2023 was 77.203 billion yuan.

According to the survey results of the survey of China's public cloud market in the second half of 2022 by IDC, a third-party data analysis agency, Alibaba Cloud's market share was 31.9%, and the next four HUAWEI CLOUD, Tianyi Cloud, Tencent Cloud, and Amazon AWS had a share of 12.1%, 10.3%, 9.9%, and 8.6%, respectively.

This shows that the easiest bone to gnaw in the field of cloud computing has been developed. The existing stock is basically divided, and the actual imagination space of Alibaba Cloud may not be as vast as previously estimated.

With the recent opening of the domestic cloud computing price war, the industry has launched a new round of reshuffle. However, every player on the cloud track is a proper hard stubble, some are backed by giants such as Tencent and Huawei, and are determined to win self-developed cloud computing, and players such as Tianyi Cloud rely on operators and have unique advantages in broadband costs and competition with large government and enterprise customers. Amazon AWS, ranked fifth, as a worldwide cloud computing overlord, is difficult to surpass at the technical and international business level.

It is foreseeable that even if Alibaba Cloud takes the lead in releasing a price war move, existing customers are difficult to be leveraged due to data migration and other reasons, and it is not easy to explore new customers, and the pattern of the domestic market will remain stable for a long time, at least in the process of Alibaba Cloud's listing, it is unlikely that a major reshuffle will occur.

For Aliyun, a domestic leader, although the opportunity to go overseas is widespread, it is still very difficult to grasp. Cloud vendors represented by Amazon AWS and Microsoft Azure have developed a robust and complete ecosystem:

According to IDC, 95% of Microsoft's cloud revenue is contributed by 300,000 partners, and Microsoft brings enough increments for partners: "For every $1 earned by Microsoft Cloud, partners earn $9.58." ”

The business of international cloud giants is highly mature and the competition between them is fierce, and the current technical advantages and customer maintenance capabilities of domestic manufacturers represented by Alibaba Cloud are not significant enough. The diversity and complexity of international markets have increased the difficulty of Alibaba Cloud's global challenges. Regulations, cultures and business practices vary from country to country and region and require services tailored to local conditions.

If it is aiming for overseas markets, Alibaba Cloud needs to continue to increase investment and resource allocation in overseas markets to meet the needs of local users and go head-to-head with Amazon and Microsoft.

An independent listing is an opportunity

In this case, an independent listing may give Alibaba Cloud some unique competitive advantages.

The first is independence and freedom, which could become an important advantage for it to lock in a wider source of customers in new technology waves such as large models. Compared with the decision-making process at the entire group level, Alibaba Cloud can make strategic adjustments and investment decisions more quickly after independent listing, and more flexibly meet market demand.

It can be expected that after the independent listing, Alibaba Cloud will have more resources and funds for technological innovation and research and development. As the domestic cloud giant increases its investment in cloud computing, artificial intelligence, big data and other fields, it will continue to promote the research and development of new technologies and solutions in the industry, and provide more high-quality products and services to different customers.

The more independent Alibaba Cloud will also have more advantages in the cooperation process: by strengthening cooperation with other technology companies, partners and developer communities, this independent cloud vendor will have the opportunity to build a more open ecosystem, thereby expanding its influence and user base, forming a positive cycle, and ultimately leading to a more complete and competitive product ecosystem.

It should be noted that the competition in the cloud computing industry is fierce and complex, and other leading cloud vendors will not sit idly by. Internationally, cloud vendors such as Amazon, Microsoft and Google are also increasing investment and innovation to maintain their leading position.

Domestic cloud vendors represented by Tencent, JD.com, Huawei, and Tianyi are also showing their capabilities, trying to gain more chips for the wave of big models, artificial intelligence and cloud computing in the next decade.

The recent news that ByteDance has invested $1 billion to purchase GPUs from NVIDIA has fully demonstrated the current fierce competition.

From this point of view, the independent listing of Alibaba Cloud may trigger a reshuffle in the cloud computing industry. As the first leading cloud vendor to be spin-off and listed separately globally, Alibaba Cloud's independent listing may lead other cloud vendors to follow suit, promote the transformation of the entire industry, and affect the redistribution of market share.

Whether it is 200 billion or 800 billion, Alibaba Cloud still has a long way to go to support its own valuation and convert it into a market value recognized by the capital market in the future.

Author | Wu Xin