Alibaba 'Technology Tree' To Keep Growing With Support From Chip Arm Pingtouge

● Both Alibaba's revenues and adjusted-EBITA have been consistently growing, and in the fourth quarter of 2020, Alibaba Cloud's adjusted-EBITA turned positive for the first time.

● Pingtouge's appearance was the result of market progress and self-improvement through massive R&D spend. 

● Pingtouge benefited hugely from Alibaba's cross-industry clout.

● Even though a number of drivers have accelerated Pingtouge's development, it still faces risks from rising costs and competitors. 

The largest chipmaking project of Alibaba Group (NYSE: BABA), Pingtouge engages with core developments in Internet functions and Cloud services, assisting the Hangzhou-based e-commerce giant to strengthen its presence in the technology market. 

On July 24, 2020, Pingtouge announced that it had developed the country's first full-chain smart contract processor customized to power AntChain's business as a primary chip infrastructure provider. Thus far Pingtouge has achieved significant results in improving semiconductor chips. For instance, on July 25, 2019, the company released its RISC-V processor, the XuanTie 910, for a handful of applications including autonomous driving.

Here, we discuss the rationale behind creating Pingtouge, the place of the chipmaker in Alibaba's growing ecosystem, and the main risks facing the company. We are bullish on Alibaba, and its chip project is one of the reasons for our positive stance.

Financial analysis

According to Alibaba's latest financial statements, there has been a dramatic upward trend in its profits. Specifically, from 2018 to 2020, the growth rate of its revenues was about 86.58%. Relating to the revenue structure, its core segments include Tmall, Taobao, and Cainiao, accounting for around 85.94% of 2020's total. Moreover, when compared with Alibaba's different sectors by adjusted-EBITA, only the core commerce sector had positive values during these three years. In other words, the core commerce sector's profits offset other sectors' losses. 

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