Alibaba Group (BABA 0.64%), the Chinese e-commerce giant, derives its name from the character Ali Baba from the Middle Eastern folk tale collection One Thousand and One Nights. There may not be 1,001 reasons to invest in the company, which reported better-than-expected sales growth for three months that ended in September, but let's narrow it down to four.
Image source: Alibaba.
1. Record-breaking Singles' Day
Alibaba set a sales record on Singles' Day. What the heck is Singles' Day? It's the world's biggest shopping day of the year in terms of retail sales -- bigger than Thanksgiving, Black Friday, Cyber Monday, and the weekend in between combined. Singles' Day was founded in Nanjing University when Chinese students began hosting parties for single people to combat the social stigma attached to people without romantic partners. It started out as Bachelors' Day, but soon, the holiday was extended to all single people.) Nov. 11 was chosen because the date 11-11 is written with four "ones" representing singles.
In 2009, Alibaba started offering Singles' Day discounts and has since transformed the day into a 24-hour bonanza of online shopping in China.
This year, sales for Alibaba exceeded expectations. The company said sales on its platform had risen to $36.5 billion by 11 p.m. after passing last year's full-day total of $30.8 billion before 6 p.m. This year's Singles' Day was the first since Alibaba's founder Jack Ma stepped down in September. (He remains a member of the Alibaba Partnership, a 36-member group with the right to nominate a majority of the company's board of directors.)
2. Growth story vs. fears about the Chinese economy
Some investors are concerned about Alibaba because of a possible slowdown in the Chinese economy. It's telling that some young people say they're postponing spending on big-ticket items because of a potential slowdown. A possible trade war with the U.S. has affected China's exports and investments, which accounts for much of the concern about the Chinese economy. Chinese online spending is growing faster than total retail sales but also is weakening as economic growth decelerates.
But Alibaba built its success largely because of an ever-expanding Chinese middle class. And that segment is accustomed to ordering anything and everything online. Wang Tao, chief China economist for UBS, said consumer confidence had gone up since last year, citing a survey in May that showed consumers were still buying because their salaries had gone up and their property wealth had increased as well.
Alibaba expects its momentum from a strong third-quarter to continue, with 29% sales growth and 26% earnings growth next year. Alibaba's growth story indicates that fears about the Chinese slowdown are overblown.
3. Work to improve algorithms to help advertisers sell ads
Alibaba makes its money selling ads and taking commissions from businesses and apps. The company has focused on improving algorithms that help businesses sell to consumers. Among its initiatives: improved mobile monetization efforts, desktop paid-search ranking algorithms, and desktop search personalization enhancements.
4. Foray into the cloud business
Alibaba continued to see significant growth in its business sector offering cloud computing services to businesses. CEO Daniel Zhang cites Alibaba's estimate that internet companies spend 80 billion renminbi (about $11.4 billion) on information technology, while the public sector and other industries spend an additional 300 billion renminbi (about $42.8 billion). Zhang said Alibaba seeks to gain a bigger portion of that via its cloud business. And it's well on its way, as revenue for cloud services grew 64% to $1.3 billion in the third quarter.
The company has a relatively low price-to-earnings (P/E) ratio of 20.80, especially compared to Amazon (AMZN -1.65%) at 65.16. Taking all this into account, Alibaba remains a good choice for investors -- single or married -- looking for value.
