You all know the headlines: the biggest ever tech float. The biggest ever Chinese float. The biggest ever US IPO. In fact, after yesterday's increased price range, very likely the biggest IPO ever, with the potential to raise over US$25 billion. But what exactly is Alibaba? What does it do?
Through the whole history of internet and social media listings, there has often been a disconnect between the buzz of a new float on the stock exchange, and investor comprehension of how that company's business model will work. I was in Hong Kong during the float of Tom.com in March 2000, and remember fights breaking out in the queues at brokerages (this was 2000, when people in Hong Kong still queued at brokerages for allocation) because everyone was desperate for a piece of the action - despite the fact that at the time, Tom.com had no assets, no clear business model, and barely even a web site. It did so because it was owned by Li Ka-Shing, the founder of
More recently, how many people who bought shares in Facebook had a clear understanding of how the company planned to monetize its extraordinary reach? How many really knew what its assets were? Not a majority, I would suspect; many instead believed that a company with such recognition, with contacts to so many people, must be able to perform as a stock too.
And so to Alibaba, about to join Facebook,
Alibaba is China's biggest online commerce company. It is chiefly a domestic operation, which sounds limiting, but when one considers the numbers around China's discovery of the internet, one can see the appeal: China had 618 million internet users at the end of December 2013, according to China Internet Network Information Center, or CNNIC; that figure was up 9.5% year on year but still represented less than half the national population, showing clear room for growth.
Alibaba owns stakes in all sorts of things, but operates chiefly through three sites: Taobao, China's biggest shopping site; Tmall, which specialises on online sales of branded goods and focuses on China's fast-growing middle class; and Alibaba.com, which connects Chinese exporters with companies elsewhere in the world. Between them they host millions of merchants and businesses, and have hundreds of millions of users; in terms of the amount of business handled, one can argue that Alibaba is actually the world's biggest online commerce company, not just China's. On top of its core sites it owns alipay.com, a Chinese equivalent of Paypal; and has large stakes in Sina Weibo, China's version of Twitter; and Youku Tudou, the closest Chinese equivalent to YouTube. Lately, it's gone a bit scatty in its acquisitions, buying a film business and half of the Chinese football club Guangzhou Evergrande. It has even talked about entering the banking industry, and already has a remarkably popular mutual fund called Yu'e Bao.
How big a market is China? Well, Alibaba - through its various sites - hosted $248 billion of online shopping transactions last year, which is, according to the Wall Street Journal, more than eBay and Amazon.com combined. The Journal cites data from a group called iResearch projecting that China's e-commerce market has gone from $74 billion in 2010 to $295 billion by the end of 2013, with a projected total of $713 billion by 2017. The Hong Kong broker CLSA says that 80% of China's online shopping is done through Alibaba.
Clearly, then, there's much more to Alibaba than there was when Tom.com listed. But there is one thing in common: the power of a magnetic personality at the top. Just as Hong Kongers trusted blindly in Li Ka-Shing as a bulletproof scion of business excellence, Chinese admire Jack Ma, the founder of Alibaba (though no longer its CEO). He still owns almost 8% of the company and is enormously influential within it. He has actually been a vocal critic of the capital markets, once writing that he believed in 'customers first, employees second, shareholders third' - a comment he made to employees on the very day Alibaba filed its IPO prospectus. Personally, this reminds me of Richard Branson, who took the same view when he listed Virgin; he ended up taking it private again before long, though there's no question of that happening at Alibaba after a listing as big as this one. There is a similar flamboyance too, as the BBC notes in a recent profile: "Not every company boss would dress himself in leather, don a Mohican wig, lipstick and a nose ring and sing Elton John's Can You Feel the Love Tonight? to his 16,000 employees. That was exactly what Alibaba's founder, Jack Ma, did to celebrate the company's 10th anniversary."
Another reason investors are excited about Alibaba is because of the investors who have already gained a stake before the IPO. Yahoo, the Japanese technology behemoth SoftBank and the China Investment Corporation, China's sovereign wealth fund, are all heavily represented, and several of the world's most powerful investment banks have also got in on the act. There is a sense that with names like that on the shareholder roll, it must be a success.
But none of this is quite the same thing as understanding the business model. Yes, Alibaba controls online shopping in China; yes, that's clearly a big market with immense potential. But where does the money come in? Well, not like eBay, where one is charged for listing something. Instead, Alibaba lets people list for free, but charges for advertising. Online marketplaces use a metric called gross merchandise volume, and in Alibaba's case, its most recent figure (accurate for the year to June 30 2014) was $296 billion, which, again, is more than Ebay and (we estimate) Amazon combined. But - and this is important - gross merchandise volume is not the same as income for the business itself, which is what should matter to shareholders. Alibaba's revenue over the same period was $8.5 billion, compared to $74.5 billion for Amazon - scarcely even comparable. So no matter how big Alibaba is today, it's still the potential that investors have to be excited by (and, with a much bigger operating margin than its US equivalents, there is a strong case to be made for that).
Investors will also want to think about a couple of challenges. One is whether Alibaba can maintain its dominance in an era in which Chinese increasingly do everything with a smartphone - rival tencent (which is discussed in my article Tencent: The Alibaba That's Already Listed) arguably leads the way here. And bear in mind that Alibaba originally didn't want to list in the US, but in Hong Kong - but Hong Kong couldn't tolerate the dual-class listing structure Alibaba will be using in the US, which will let Ma and other leaders nominate more than half Alibaba's board members despite owning much less than half of the shares. David Webb, long-standing shareholder activist and now deputy chairman of Hong Kong's Securities and Futures Commission Takeover and Mergers Panel, says that allowing such a rule in Hong Kong "would be a race to the bottom of regulatory standards, and not a recipe for long-term success."
And with yesterday's increased share price range, they will also want to think about valuation. As the capital markets writer Jackie Horne wrote this week: "Investors weighing up the merits of the deal are likely to have two key questions. Firstly, how much of Alibaba's undisputed growth potential is already priced into the IPO valuation? And secondly how much momentum does the deal have behind it and what will this mean for the deal's likely secondary market performance once it lists on the New York Stock Exchange?"
Chris Wright is the author of No More Worlds to Conquer, published by HarperCollins.
