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Alibaba Cloud Computing Unit: Why Investors Should Invest in AliCloud Stocks

| Mar 23, 2017 08:31 AM EDT

Alibaba Cloud Computing Unit

Alibaba may be popularly known for its online retail platform, but more than just the Chinese Amazon, the e-commerce giant is also engaged in other businesses such as logistics, cloud computing, financial services and digital entertainment, which are all influential in their own sectors.

One of them, AliCloud computing unit is increasingly attracting the attention of investors, as its stocks are at a 52-week high and its price per share, just above $100, is within a range that investors like, according to an article on Barrons.

Last week, anticipating the major role that Alibaba could play in the Internet cloud storage and computing, Morgan Stanley advised clients to invest in Alibaba as it sees its stocks to reach $140, or even $156.50, at its best.

According to Barrons, Alibaba's potential is often understated and investors look at it as simply an Asian version of Amazon, eBay and Paypal combined. But more than that, the Chinese e-commerce titan has the potential to grow bigger than expected since it is in a position to leverage on China's emerging middle class.

Buying stocks

Hence, it advised investors to buy Alibaba stock as a long-term investment. The company's stock has risen 20 percent annually and the 52-week range is between $73.60 to $109.87. The latest share price is around $107.

But for those who do not want to buy a stock near the 52-week high or who wants to buy a share on a pullback, they may consider selling downside put options, in which put sale can be paired with upside call purchase.

At $106, an investor may sell the stock at its May $105, put at $4.04. The put sale is a stand-alone trade or may be paired with buying the May $110 call for $2.68. The put trade is a strategy used by investors to buy stocks at a discount.

Investors may take the put premium as earning, if Alibaba's bull outlook continues and the stock remains high below the put strike price, which is $4.04. But if the stock drops below the put strike expiration, the investors will be forced to buy the stock at the strike price, which will send the stock higher and earned from the timed purchase.

Another way is to use the risk-reversal strategy by selling a put and buying a call. This strategy leverages on the pricing dynamics in the options market. In this way, investors can participate in the potential upside through the May expiration.

Future growth

Morgan Stanley said that Alibaba's cloud business is underestimated. Together with Google's Alphabet, AliCloud may be the smallest cloud players at present but in the next four years, they are expected to grow faster than the others.

According to Morgan Stanley, Microsoft and Amazon may still be the biggest cloud players by 2020, with $47 billion and $35 billion in cloud revenue, respectively.

But Alibaba will be the largest share gainer, as its cloud revenue rose from $1 billion in 2016 to $10 billion. From 10th place in 2016, it is now ranked as the fifth largest player in the industry.

By 2021, AliCloud may contribute about 18 percent to Alibaba's sales, an increase from an expected 4 percent share in 2017, the bank said.

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