May 20th, 2014
by Aura Gilham, GEI Associate
E-commerce no longer feels foreign to American consumers or corporations, but the scale of e-commerce Alibaba (www.alibaba.com), a Chinese company facilitating online transactions, foreshadows may revolutionize the world of online shopping. Alibaba primarily maintains online platforms for various retail brands to connect with consumers, such as Tmall.com, but it also presides over many satellite companies, including versions of well known American companies such as Ebay, Amazon, Paypal, etc. Though it may appear as nothing more than another e-commerce site, Alibaba claims four out of every five dollars spent in China, the second largest market internationally, and is poised to claim significant parts of both the international consumption and loanable funds market.
Shaping up to be the single largest online market internationally, Alibaba facilitated the sale of over $248 billion of goods in 2013. Growth remains strong, as sales roles 66% and earning multiplied 110% in the fourth quarter of 2013 alone. In fact, in analysis based solely on value of merchandise sold, Alibaba surpassed the values of Ebay and Amazon combined last year. The Chinese e-commerce market currently fluctuates slightly below 300 billion U.S. dollars, but extrapolation of the sector's growth suggests this value will more than double in the next five years. With a profit margin of 45 percent in an industry continuing to grow steadily internationally and exponentially domestically, investors and competitors alike would be wise to keep a wary eye on this virtual giant.
Despite an initial $1 billion (U.S. dollars) IPO filing compared to Facebook's $5 billion filing, analysts expect the IPO to increase to between $15 and $20 billion and surpass Facebook's record as largest tech IPO. Alibaba, however, learned from Facebook's IPO flop and seeks to maintain realistic stock prices on opening day.
Analysts expect the post-IPO valuation of the company to range from $136 billion to $245 billion, which, even on the lower end, surpasses Facebook and many other wwell-known companies. As the company's share price and number of total outstanding shares play key roles in calculating valuation, current estimates remain largely based on projections of performance, accounting for the positive cash flow, industry growth and significant net profit margin.
Currently, Alibaba reported a self valuation of $109 billion, a value only 20 times sales and considered conservative by most analysts. (For perspective, consider Twitter's valuation of $24.9 billion, which was 40 times sales.)
The implications of such a large IPO may reach far beyond the ecommerce origin; consider the stake of Yahoo!. Struggling American company Yahoo! owns approximately 20% of the Chinese retail giant and positioned itself to sell about half of its stake for a total of $10 billion. In great need of a successful rebranding, Yahoo! may finally possess the capital to challenge the market share of the most prominent search engine, Google. However, when using a $130 billion valuation for Alibaba, Yahoo!'s 22% stake in the Chinese company accounts for 60% of Yahoo!'s worth. This skewed financial relationship suggests Yahoo!s use, buyback or acquisition, of revenue gleaned from relinquishment of Alibaba stock will determine the future success of the company.
Concerning direct profit from Alibaba stock, investors must remain alert. As investors may not trust Chinese corporations completely, investor expectations following news of potential conflict within the company between company interests and chairman Ma's personal interest will largely determine the performance of publicly traded shares of Alibaba stock. Furthermore, opportunities for corruption abound, as the members of management will nominate a majority of the company's directors, meaning individuals will possess little to no influence over corporate issues. While some, such as Lise Buyer, an integral part of Google's IPO, assert, "This is one of those risk factors they have to tell you about, but you don't have to worry about it as long as Jack Ma retains a meaningful stake in Alibaba", others warn of impending doom and corruption.
Investors should also consider the grey state of legal matters. As the variable interest entities used by the company to raise money through offshore entities are currently under investigation, the profit margins of the company may be variable in the coming months and years. Additionally, American investors must remain conscious that shares of Alibaba will not be regulated by the U.S. government. Not only will investors be suspect to potential natural economic slowdown, but also the economic control of the Chinese government. As the Chinese government continues to strictly regulate the economy of China, companies may be directed to act in inefficient ways and be unable to capitalize on all potential market share.
As for Alibaba's near future, Ma plans to remain largely within China, as online consumption represents only 7.9% of total expenditures in China. As consumption in China currently fluctuates around 36% of GDP, not nearly comparable to consumption's claim of 67% of GDP in the U.S., the potential for growth remains enormous. China's market is small, but growing fast, and Alibaba is poised to uncover much of its treasure.