If you think you are updated on all the latest Wall Street news but do not have much idea about the IPO announcement by Alibaba, you have not been paying attention. Don’t worry though – in this discourse, we have highlighted some salient points about the company, its owner, and of course the IPO.
Every year, hundreds of companies go public on the US stock exchanges. In 2014, already more than 80 companies (including a fair share of tech firms) have filed for their initial public offerings (IPOs). So, why has the upcoming IPO by Alibaba Group Holding – a Chinese e-commerce company – created such a buzz in the Wall Street circles? Let’s look at the reasons:
- Alibaba is big – No, scratch that – it’s huge. In fact, Alibaba makes US e-commerce giants like Amazon and eBay look miniscule in comparison with its own scale of business. The company reached a total sales volume of almost $240 billion in the last year. For the same period, the transaction volume on Amazon was about half, and that on eBay was only about one-third.
- Jack Ma founded Alibaba – And by now, it is evident that he has a big money-spinner on his hand. The stupendous popularity of Alibaba in China (it practically wiped off eBay from the Chinese markets) has raised the net worth of Ma to around $12.5 billion. A self-confessed Elton John fan, Jack Ma is known to be the owner of a pretty big charitable trust as well. A perfect businessman, who can definitely taste success in the US markets.
- Potentially humungous sale value after day one of trading – When Facebook raked in $105 billion in value on the first day after going public, few would have thought that it would ever be possible for any other tech firm, consumer agency, or mobile app company to surpass that figure. Alibaba, however, seems poised to overtake that figure – and set a much higher benchmark. According to Wall Street analysts, the valuation might even touch $200 billion.
- How big will be the IPO? – Although in its IPO filing, Alibaba has mentioned that it is going for a $1 billion listing, the hype around the company is likely to push this figure much higher. If the present trends persist – the value of the listing (on either NASDAQ or NYSE) would be somewhere in the range of $17-$20 billion. The IPO record set by Visa ($17.9 billion) can well be under threat.
- Sources of revenue – Given the sheer volume of Alibaba’s annual earnings, it is only natural to wonder what its principal business channels are. The Taobo marketplace and its sister shopping portal Taobo Mall are the principal sources of revenue for the company – contributing for almost 85% of Alibaba’s yearly sale proceeds. Cloud computing, international infrastructure and international commerce also come under the domain of activities of Alibaba – albeit on a smaller scale.
- Yahoo might emerge as a big winner – Say what you will about Marissa Mayer’s acquisition strategies, this is one instance where her planning has clicked, big-time. Yahoo currently owns approximately 40% of Alibaba’s total stocks, and the payoff when the latter goes public will be a really large figure. It would be fascinating to see how Mayer uses these funds to strengthen her bid to make Yahoo a solid competitor of Google in the online search and mobile sectors.
- Aliplay will get a significant boost – It’s not yet known for sure how Alibaba will manage Aliplay – its mobile payments channel after the IPO. One thing is for certain though, it will make massive inroads in this segment too. At present, over 70% of all mobile financial transactions in China are conducted via Aliplay, which gives a fair idea of how dominant the channel is in the mobile sector. Third-party app development companies might suffer.
- Jack Ma already has plans for post-IPO growth – Ma had created Alibaba in 1999, and over the years, has gained more than adequate experience on how to grab a foothold in a new market. He has already bought stocks from American companies like 1stDibs, and forked out nearly $4 billion to take over a cable television company and a mapping agency. When Alibaba started buying shares in instant messaging app Tango and retail shopping website Shoprunner – it became clear that it has plans to replicate its e-commerce success in the US markets too.
- The Single’s Day success – The buzz that Alibaba can outperform its counterparts in the United States was confirmed on Single’s Day (the Chinese version of Cyber Monday) in 2013. The total sales figure at Alibaba during that 1-day window was a stunning $5.75 million. This was about two times of what all the US retail companies managed to haul in on Cyber Monday, together.
- The classic rags-to-riches story – Oh well, Jack Ma was not quite poverty-stricken before Alibaba was founded – but you get the drift. He reportedly had to arrange for $60000 from his close friends to launch the money-minting ecommerce site. The hefty initial investment from Yahoo also helped. If Ma had not managed to come up with Alibaba, he might well have become a small-time professor in English. After all, that was his initial career ambition!
- The profit margins have kept increasing – Unlike many other Silicon Valley companies, the margins of Alibaba have not shown any form of decline over the years. In 2013, the margin was almost 67% – well over the forecasts of business analysts in China. At $3.8 billion, the adjusted EBITDA figure of Alibaba Group Holding is exceptionally high too. The success story has every chance to continue after the IPO.
- Will Alibaba’s performance live up to the hype? – That, quite literally, is a million-dollar question. For all its financial strength and business prominence, Alibaba’s foray in the US won’t have history on its side. This year alone, all the four Chinese companies that have announced IPOs in America have flopped badly – with Weibo (billed to be China’s answer to Twitter) being the most noteworthy among them. There have been security concerns about Alibaba’s online business in the past too. Whether Yahoo will be able to remain sustainable without being propped up by Alibaba (in the long-term) also remains a question.
If all things go well, Alibaba Group Holding looks set on its way to challenging Walmart for the position of the biggest retailer worldwide. Jack Ma had once revealed during an International Herald Tribune interview that his company’s name was derived from the name of a popular Arabian Nights story (‘Alibaba and the Forty Thieves’). When this company goes public in the US, it will probably account for more than the combined business of Amazon and eBay – and that will be quite a sensational story.
So, is the Alibaba IPO indeed worth the hype?
Very much so!
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