Alibaba (NYSE: BABA) is widely known as China's top e-commerce company, but it's also the country's top cloud services provider. Over the past few years, it expanded its cloud business internationally, and it currently serves multinational companies like Nestle, SAP, Philips, and KPMG.
That's why it wasn't surprising when Synergy Research recently reported that Alibaba was now the fourth largest public cloud services provider in the world after Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google, in that order. However, it was surprising that Alibaba surpassed IBM (NYSE: IBM), which slipped to fifth place.
Continue Reading Below
The news likely stunned IBM investors, who were counting on Big Blue's cloud growth to offset the ongoing weakness of its legacy software and IT services businesses. However, a closer look at Synergy's rankings indicate that Alibaba only beats IBM in the cloud by one measure -- and that IBM's overall cloud business is still bigger than Alibaba's.
Untangling the different types of cloud markets
The cloud market is comprised of private, public, and hybrid cloud deployments. Private clouds keep all of a company's data in on-premise servers, while public cloud services host all of that data remotely on cloud-based servers. Hybrid deployments keep some of that data in the private cloud, while backing up the rest of the data in the public cloud.
Of those three markets, the public cloud is the most closely watched one, since it's considered a generational leap in technology and generates the highest growth. Synergy's report claimed that IBM ranked fifth in the public cloud services market, but IBM actually generates most of its cloud revenue from private and hybrid cloud deployments. Amazon, Microsoft, Google, and Alibaba generate most of their cloud revenues from public deployments -- so it's really an apples-to-oranges comparison.
During the first quarter, IBM reported that its total cloud revenue over the past 12 months rose 22% annually to $17.7 billion. Within that total, its cloud "as a service" revenue -- which includes both hybrid and public deployments -- hit an annual run rate of $10.7 billion, representing a 25% jump from a year earlier. By comparison, Alibaba Cloud's revenue more than doubled to $2.1 billion last year.
But Alibaba still beats IBM in a key category
Alibaba doesn't generate more cloud revenue than IBM, but it's beating Big Blue in two key categories in the public cloud. Public cloud services are split into three categories: SaaS (software as a service), IaaS (infrastructure as a service), and PaaS (platform as a service) solutions.
SaaS solutions include business or consumer-facing products like Microsoft's Office 365. IaaS/PaaS solutions, which are often bundled together, offer remote computing power, data storage, and other functions to enterprise customers. A prime example of this is Amazon Web Services (AWS), which lends out computing power, hosts websites and apps, and analyzes data for developers and companies.
AWS, Microsoft's Azure, Google Cloud Platform, and Alibaba Cloud all offer IaaS/PaaS solutions, which are growing in popularity because they're more scalable and help companies reduce costs by eliminating on-site servers. Moreover, the addition of analytics and AI to these platforms helps companies turn accumulated information into actionable data. IBM's IaaS/PaaS solutions are included in its IBM Cloud Platform suite.
Gartner expects global revenues from the IaaS market to surge from $30 billion to $83.5 billion between 2017 and 2021. It also expects PaaS revenue (excluding older business process PaaS revenue) to jump from $11.9 billion to $27.3 billion. Those forecasts indicate that the IaaS/PaaS market will likely outgrow IBM's core cloud markets of older private and hybrid cloud deployments.
IBM doesn't disclose how much of its revenue comes from IBM Cloud's IaaS/PaaS solutions. However, Synergy's rankings indicate that Big Blue's services generate less than Alibaba's $2.1 billion in annual revenue -- which compares poorly to market leader AWS' trailing-12-month run rate of $19.2 billion.
Why IBM investors should be concerned
Last May, Warren Buffett started selling his stake in IBM. At the time, he told CNBC that Big Blue was a "big strong company," but that it had "run into some pretty tough competitors." Most investors probably assumed Buffett was talking about Amazon, Microsoft, or Google at the time, but Alibaba's incredible growth also makes it a major threat.
IBM needs its cloud services, a core part of its higher-growth "strategic imperatives," to keep growing to boost its sluggish sales growth. IBM recently broke a multiyear streak of revenue declines with two quarters of positive growth, but that growth was heavily buoyed by a soft dollar. Big Blue could struggle to maintain that streak as the dollar strengthens, and its cloud growth could be throttled by its higher-growth rivals.
10 stocks we like better than IBMWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and IBM wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of June 4, 2018
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.