Alibaba IPO; The Business Leader Decision

Alibaba IPO; The Business Leader Decision

A bit of stock market history is expected to unfold this week when the Chinese, internet commerce company Alibaba begins trading on the New York Stock Exchange. As initial public offerings go, this one is as big as they get with pricing set to raise more than $24 billion for the company.

Business leaders constantly see investment opportunities come across their desk (most of it much smaller in scale than Alibaba) from real estate to start-up companies. As their net worth grows, so does the number and variety of investment possibilities steered their way.

Regardless of the size or profile of the investment, we make it our job to evaluate these opportunities for our clients to determine whether each fits their strategy and risk tolerance. Regardless of the particular investment at hand, we want our clients to look smart and informed, and to know where to put their energy.

This is no less true of Alibaba. What makes the Alibaba IPO different is its visibility and the news coverage it has and will continue to receive this week. That makes even more important our role as a source of unbiased advice.

We are not recommending Alibaba stock as a wealth-creation strategy nor do we have a stake in selling it, although we recognize it represents a unique investment in the long term. We would be remiss if we did not address the implications of the IPO, especially because Alibaba’s closest competitor, Amazon, is in our back yard.

Education, not promotion, is our imperative. Here are some nuts and bolts about the IPO if you are a business leader:

The IPO per share price is expected to be above $60, perhaps going higher. Most of the initial investment will be made by institutions and private equity firms. Its expected, post-IPO market capitalization will be about $155 billion, about the same as Amazon’s. By comparison, Facebook’s market cap is $200 billion; Google’s is $400 billion; Apple, the world’s most valuable company, is worth about $600 billion.

Founded in 1999, Alibaba calls itself the world’s largest online and mobile commerce company, sort of a combination of Amazon, eBay, and PayPal. Its platform includes a marketplace, escrow services, online marketing services, and a smart logistics system.  Its infrastructure connects small business owners to logistics providers, increasing traffic and volume.

From June 30, 2013 to June 30, 2014, Alibaba’s revenue increased 46%; its operating income increased  26%; its adjusted net income increased 60%, and free cash flow increased 74%.  The company’s gross merchandise volume (GMV) was $248 billion in 2013, more than all its competitors combined. By comparison, Amazon’s GMV in 2013 was $116 billion and eBay’s was $88 Billion.

Revenue is generated primarily from merchants through marketing services, commissions on transactions, and fees for online services.  Valuation ratios remain very attractive relative to expected growth.

Consumption is on the rise in China fueled by the growth of its middle class, a demographic shift that is well documented.  Online shopping in China is projected to grow at a compounded annual rate of 36% over the next three years.  All signs indicate an opportunity for high growth in years to come.

Some downside risks:

–          Alibaba relies on Alipay for payment processing and escrow services.  Alipay’s business is highly regulated, and if its services were limited, restricted, or curtailed in any way, it would have a material impact on Alibaba’s business.

–          Alibaba has experienced some negative publicity in the past regarding sales of counterfeit and pirated items on its markets.

–          Its ownership structure is complicated with Jack Ma having too much ownership, preventing Alibaba from doing its IPO on the Hong Kong Exchange.

–          60% of the IPO is allocated to selling shareholders.

Due to the speculative nature of this kind of investment, we are not recommending this investment unless specific client circumstances dictate. If you are interested in learning more about IPO’s or Alibaba, please let us know.

John Christianson
john@highlandprivate.com
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