Alibaba: Largest IPO ever

Before now, virtually all the world’s largest companies, particularly in technology, have come from the U.S., and although Alibaba still trails many U.S. technology companies and perhaps the top 25 largest U.S. companies, the IPO event does point to the progress that Chinese companies have made in becoming relevant in the global techno-financial landscape of […]

Before now, virtually all the world’s largest companies, particularly in technology, have come from the U.S., and although Alibaba still trails many U.S. technology companies and perhaps the top 25 largest U.S. companies, the IPO event does point to the progress that Chinese companies have made in becoming relevant in the global techno-financial landscape of the world.
Alibaba was priced at IPO at $68 a share, which is far bigger than the amount speculated back in May of this year. On Friday, 19 September 2014, the first day of trading, the opening price was driven to $92.70. The share ended at $93.89 at the end of that day, yielding a 38% increase over the ($68) price at IPO. On that first day of trading, 57 million shares of Alibaba were traded by the first minute of trading, and the volume of trading on Alibaba stock at the end of that day was 271 million shares. By comparison, 581 million shares of Facebook were traded on that same day. At $68 a share, Alibaba’s market capitalization (cap) was $176 billion; at the end of the first day of trading the value was $231 billion. (Facebook’s market cap at the end of Friday was $200 billion.) Note however that Facebook is better valued than Alibaba (market value per earnings of 83 versus 45 for Alibaba). This suggests that investors have reservations about the Chinese company that they don’t have about Facebook.
The $21.8 billion that Alibaba raised at IPO makes the company the largest U.S.-listed IPO ever, and slightly trailing Agricultural Bank of China Limited’s $22 billion debut in 2010, for the global record. Alibaba’s IPO trumped, for internet companies, previous record holder Facebook’s $16 billion; the amount that Facebook raised on the day of its IPO on May 18, 2012. At IPO, underwriters set Facebook’s stock price at $38 a share, with a valuation of $104 billion.
So, why is investing in Alibaba so attractive? Exploiting China’s population, Alibaba is the world’s largest Internet commerce company, with over 230 million active buyers using its website; over 11 billion annual orders and $296 billion in annual merchandise sales. Investors are also attracted by Alibaba’s prospects for getting bigger. Its current level of shoppers is still less than half of China’s 618 million Internet users. In a country with a population of 1.35 billion and currently less than half Internet penetration rate, the potential for growth of Alibaba is high. Also to Alibaba’s advantage is the fact that, unlike in the U.S., and because China is relatively under-developed, competition from brick-and-mortar retailers is far insignificant. However, issues of whether or not more new Chinese Internet users will spend are always there. After all, Chinese Internet shoppers spend far less per person than in the U.S. If this pattern changes, then the speculated prospects on Alibaba might well come to fruition, to the delight of investors.
There is also another attractive component of Alibaba’s business: the company has very high operating margins (40 percent). In comparison, eBay has 20 percent, Google, 23 percent, while Amazon is still struggling to be profitable. Alibaba’s current size, coupled with its margins, represents the kind of “natural” monopoly cherished by investors. The company attributes this profile to the “natural interactions between buyers and sellers,” which it refers to as the “network effect.” With the network effect, more merchants attract more consumers, who, in turn, attract more merchants. Note that Alibaba achieves its high margins by doing away with high-cost, low-margin businesses that have, in the word of James Stewart of New York Times, “dogged Internet retailers in the United States.” Alibaba is simply a platform for connecting buyers and sellers. The company does not engage in direct sales, compete with their merchants, or hold inventory.
The disposition of Professor Bruce Greenwald of the Columbia Business School in New York City is reminiscent of the statement: “When investors are hungry, that is when you should be cautious,” which is attributable to Warren Buffet, the great American investor. Professor Greenwald strongly feels that Alibaba was over-valued. He does not feel that Alibaba should be valued more than twice eBay’s $65 billion. “There is a lot of hype in Alibaba, and that’s what you are seeing in the price,” Professor Greenwald was quoted as saying.
Looking into the future, it’s relevant to ask how Alibaba will spend all the money it raised at IPO. Also pertinent and of concern is the fact that in the U.S. and Europe, no one company dominates e-commerce, the way Alibaba does in China. Also, the largest retailers in those developed economies are the likes of the old-economy Walmart of the U.S. So, it’s plausible to suggest that the landscape may change as well in China as the country becomes more developed. Alibaba may need to re-invent itself at that point, in order to continue to thrive. Many also advise caution on Alibaba’s future: a) company’s corporate structure is opaque, b) the fact that investors buying into Alibaba will not get a true ownership stake in the company’s operating businesses, but a contractual right to profits from the businesses, c) Alibaba’s spending pattern, and d) the fact that the company does not have a fully-fledged distribution network.  
The take-away from this article is that the Chinese e-commerce behemoth, Alibaba, has finally gone public, in what is considered the largest U.S.-listed Initial Public Offering (IPO) in history. In spite of the apparent bullishness, concerns about Alibaba’s future remain.