Investors looking to Alibaba's smaller businesses for next growth spurt

Alibaba’s (BABA) record-breaking sales on China’s 11.11 holiday failed to provide any lift for investors.

The Chinese ecommerce giant said consumers grabbed over $9 billion of highly discounted goods on “Singles Day,” an anti-Valentine’s Day that has become one of the biggest shopping days on the planet. But Alibaba shares, which had been on a tear of late, lost almost 4%, trimming about $10 billion off the company’s market value.

Some ups and downs are inevitable for such a fast-growing company. In the long term, however, further major gains in the stock price will depend on more than just the ecommerce habits of China’s growing middle class.

Alibaba is currently worth $284 billion, up 69% from its initial public offering two months ago. That’s four times the current stock market value of eBay (EBAY), double the value of Amazon (AMZN) and even 10% more than Walmart’s (WMT) value.

Some mock Alibaba’s valuation heights, but with $328 billion of merchandise moved across its various sales channels over the past year, the company is rapidly approaching Walmart’s $480 billion of annual sales. Walmart acquires all the goods itself to sell in its stores, while Alibaba acts as more of an online facilitator. (Yahoo, the parent of Yahoo Finance, owns a 15% stake in Alibaba.)

Without the costs of carrying all of the inventory and owning physical stores, Alibaba’s profit margin is much higher. The company reported net income of $6.3 billion in the past year, which is almost half of what Walmart made over its most recently reported 12 months, and growing quickly. While the Alibaba figure is almost double what it made in its last fiscal year, Walmart’s net income is less than it made in any of its last three fiscal years.

Looking for Alibaba's new growth avenues

But after the 69% share price run-up, Alibaba investors have priced in much of the expected ecommerce growth in China. To justify another leap forward, some of Alibaba’s other bits and pieces will have to become significant businesses as well.

Investors have identified some potential future big plays, including Alibaba’s web sites catering to consumers outside of China, Internet hosting service, logistics and delivery affiliate and, of course, its links to the popular payments platform, Alipay. Not all are owned outright by Alibaba, but are under the control of the company’s executive chairman Jack Ma.

Alipay is the best known and, likely, easiest to value of these side bets. The company, which was a part of Alibaba until 2011 when it was spun off, has 300 million members and processed almost $800 billion worth of transactions for the year ended June 30. Analysts say it could already be worth $60 billion to $80 billion on its own – and Ma said on Tuesday that he’s already contemplating an IPO.

Under a deal struck before its IPO, Alibaba will be entitled to a 33% stake in Alipay if the payment arm goes public. And Alipay also has many avenues for new growth, as it spreads beyond China and into savings, lending and other financial service markets.

Ma appears to be following the Jeff Bezos playbook for his Internet cloud services unit, Aliyun. Bezos began selling excess computing capacity from Amazon’s own server network back in 2006. Now Amazon Web Services is taking in $5 billion and growing fast despite heated competition. Alibaba held a developer conference for Aliyun customers last month and is striking partnerships to bring more useful features to the platform. Revenue rose 43% to $85 million in the first six months of 2014 compared to the first half of last year.

Alibaba owns a minority stake in a delivery and warehouse joint venture, China Smart Logistics, which is larger than United Parcel Service (UPS) as measured by the number of packages delivered. Fund manager Daniel Loeb, who owns Alibaba shares, says the business could bring in $50 billion in revenue within a few years.

Finally, Alibaba is also seeking to outmaneuver Amazon, eBay and Walmart around the world. Only 11% of Alibaba’s commerce sales in its most recent quarter came from outside of China, but expanding outside of its home country is a top focus. The company’s experience in China may be more applicable to developing countries than the experiences of U.S. ecommerce companies.

Alibaba carries some potential risks that have yet to become a real investor concern. Although Alibaba is growing fast in mobile commerce, it could be outpaced by companies like Tencent (TCEHY), which is adding ecommerce features to its popular messaging app Wechat in China. Any downturn in the Chinese economy would also obviously threaten Alibaba’s growth, as would difficulties with China’s governing authorities.

Still, the optimistic case is swaying more investors.

“We have seen Alibaba’s pattern for growing businesses and believe that they are inclined to focus on share over profits until they reach enormous scale,” Loeb wrote in his third quarter letter to investors. “Once a business achieves ubiquity, profits can ramp very quickly.”