The impending IPO of Alibaba (NYSE:BABA) has been a long time coming, and it now finally looks like it could be here as the company announced that its IPO target price is going to be between $60 and $66 a share potentially valuing the company at $166bn, which is slightly below expectations of $200bn.
Alibaba, owned by Jack Ma, is China’s version of Amazon.com Inc (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) combined and will be the largest ever listing on the New York Stock Exchange raising as much as $24.3bn, comfortably beating Facebook Inc (NASDAQ:FB) and Visa Inc (NYSE:V)’s listings.
Alibaba’s core business is operating online marketplaces Taobao.com and Tmall.com which handle around 80% of online retail transactions in China, with a value of $248bn.
The company has aspirations of being a tech giant to rival Google Inc (NASDAQ:GOOGL), Amazon and Facebook and its number of acquisitions reflect that which now include media and finance companies, department stores and even a football team.
In its latest regulatory filing Alibaba reported that in the second quarter it earned nearly $2bn on revenue of $2.5bn, 46% higher than the year ago period. The company has 270m users that it terms “active buyers”, up 9% in just the one quarter, but slowing from 14% growth two quarters ago.
Alibaba shouldn’t face the same teething problems as Facebook given that mobile merchandise sales have close to quadrupled to almost a third of total volume.
Fundamentally everything seems in place for Alibaba’s stellar growth to continue; China’s internet e-commerce market is still rapidly expanding and Alibaba is the dominant player.
The biggest source of competition currently comes from Hong Kong-listed Tencent. The two companies operate different core businesses with Tencent more heavily involved in social media and messaging but both are expanding and making acquisitions in the same spaces and competition can only increase.
For those China bulls who believe the country will someday overtake the US as the world’s largest economy, Alibaba provides a way to buy into China’s new non-state-owned economy. China already has twice the number of people on the internet than America so the growth potential is clearly there. Only 40% of China’s 1.35bn population is online compared with 80% of the 317m people in the US.
China’s internet growth is exciting but does warrant some caution. The great firewall of China, the country’s censorship and surveillance program is a sticking point.
What if for example, the government just decided to block some or all of Alibaba’s services? Investing inside a planned economy has risks but China despite its recent slowdown is still growing at a much faster rate than any developed nation.
Most of Alibaba’s revenue comes from China so the company’s decision to list in New York appears to be largely driven by looser restrictions on corporate governance than Hong Kong.
CEO Jack Ma and a group of senior managers want the power to choose the majority of the board of directors to help maintain control of the company.
If it were just a matter of giving up voting rights, investors might be inclined to let founder Jack Ma do his thing given that it seems to have worked so far. The bigger worry is the overall lack of transparency implied by the company’s corporate setup.
In 2011, Alibaba spun off Alipay, its online payment unit similar to PayPal to a company controlled by founder Jack Ma. Ma defended the actions as necessary to reflect changes to Chinese government regulations but large shareholders Yahoo! Inc (NASDAQ:YHOO)! and Softbank Corp. (TOKYO:9984) said they didn’t learn of the transfer until after the fact. Subsequently an agreement was met for Alipay to pay royalties to Alibaba with a payout up to $6bn in case of a sale.
The Alipay debacle highlights the potential risk to shareholders of having less voting control; it’s proven history of opaque Chinese law and management decision-making.
With the company on an acquisition spree, extra clarity is needed for investors to ascertain the difference between core business performance and one-time items resulting from the deals which could artificially inflate revenue growth in the short term.
The company’s complicated corporate structure is in large part to avoid Chinese law that prohibits foreign ownership in certain industries which supposedly includes the internet. The company’s head office is in China; it is incorporated in the Cayman Islands and is to be listed in the US.
Alibaba’s trifecta of locations could limit the number of buyers able to invest in the stock and as such how well the stock can do. Funds dedicated to buying Chinese stocks won’t have enough capital to cover the size of the IPO, more diversified funds will suffer from portfolio limits on exposure to China and retail investors likely won’t have had the exposure to the company to invest in sufficient numbers.
Inclusion in S&P 500 should not be possible because Alibaba is not domiciled in the US but the fact that it’s listed in the US means the biggest indexes from FTSE 100 and MSCI Inc (NYSE:MSCI) would likely not classify it as part of emerging markets. Demand from Index or index-tracking investors creates a longer term shareholder base that can minimise downside but long term shareholders Yahoo! and Softbank may soften the blow.
With trading expected to start on September 19th interest is likely to remain high. There is no denying the size and growth of Alibaba’s earnings and its enviable profit margins and there is every reason to believe it can continue on the same trajectory.
Investors do have a choice though, they can be willing to accept the increased risks from lost control and transparency to put them in a position to reap the rewards of buying into one of the biggest, fastest growing companies in the world, or they could look at buying into Yahoo, given that its stake in Alibaba is larger than its current market capitalisation.
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