Breakingviews - Alibaba polishes its crown and half-hidden jewels

The logo of Alibaba Group is seen during Alibaba Group's 11.11 Singles' Day global shopping festival at the company's headquarters in Hangzhou, Zhejiang province, China, November 10, 2019.

HONG KONG (Reuters Breakingviews) - Alibaba is showcasing all its jewels. Quarterly sales growth at its main shopping business has rebounded. But cloud computing is growing nearly twice as fast while fintech affiliate, Ant, is on track for an epic initial public offering.

Things are back to normal for the e-commerce giant. Sales at the core Chinese business, which includes its shopping sites and supermarkets, topped $14.3 billion in the three months to June, up a healthy 34% year-on-year. That’s roughly in line with rival Even so, peers including arch-rival Tencent and local challenger Pinduoduo are smashing it. The latter, whose stock has more than doubled this year, is expected to deliver a 66% rise in quarterly sales on Friday, analyst forecasts on Refinitiv show.

Boss Daniel Zhang has other gems too. Revenue at the company’s cloud computing division jumped 59%, to $1.7 billion, as more Chinese enterprises shift their operations online. The business is an early leader in China’s nascent but fast-growing cloud sector. Analysts at HSBC optimistically estimate it could ring in 80 billion yuan ($11.6 billion) in sales by 2022. On 6.4 times forward sales - a discount to more mature global competitors - the bank calculates Alibaba’s cloud business could be worth $74 billion.

Ant’s upcoming debut is another bright spot. Alibaba converted a profit-sharing agreement with its payments affiliate into a 33% stake in 2018. That same year, Ant raised funds at a $150 billion valuation, according to Reuters. The fintech giant is now readying a dual Hong Kong-Shanghai listing that could value it at more than $200 billion. Alibaba’s stake, along with its cloud arm, account for roughly a fifth of the e-commerce giant’s $676 billion enterprise value.

Shares of Alibaba have risen 23% since the start of the year, outpacing the broader S&P 500 but trailing many technology peers. Alibaba’s stock now fetches 27 times forward earnings, Refinitiv data shows, below Tencent’s 32 times - suggesting a stubborn valuation discount has widened over two years. Crystalising a valuation for Ant might help to close the gap and a listing of the cloud business could make sense too. Zhang has multiple levers to pull on.


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