Alibaba IPO: Is it worth the hype?
Alibaba's flotation is one of the most hotly anticipated events of the year - but questions remain over the Chinese ecommerce giant
Friday 05 September 2014
The Chinese proverb "if you have money you can make the devil push your grind stone", essentially money is power, could well prove a prescient one as Alibaba prepares to list this week and further shake up global e-commerce.
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The online giant’s gargantuan $20 billion initial public offering (IPO), which could value it at up to $200 billion, has caused a stir worldwide and its reported 40 per cent profit margin has whet the appetite of investors. However, questions over how much the firm will need to invest to expand in Europe and the US amid fierce competition remain.
It is not the only concern that has enshrouded the huge firm which spans a business-to-business market portal, an eBay-like marketplace for consumers and an entertainment division.
Alibaba has moved to assuage the market by signing a deal with the China-Britain Business Council to protect intellectual property and crackdown on counterfeiters and last month it suspended shares in its film unit after discovering potential financial irregularities prior to its June acquisition from ChinaVision Media Group.
The float was initially expected last week and was subsequently pushed back but the delay is understood to centre around a re-filing demanded by the US Securities and Exchange Commission to offer clarity over the company’s multifaceted structure.
Michael Ross, co-founder of online retail consultancy eCommera, explains this complexity could spook investors. “It helps to be broad to engage the customer but these businesses are so complex,” he says. “Their performance is so hard to predict – it’s hard to forecast the growth dynamics in such a young industry.”
Ross is amongst those sceptical about Alibaba’s long-term profitability. “The numbers are vast but it is hard to know exactly how that translates into hard dollars,” he says. “It’s similar to Amazon. Its market place is a critical piece of the jigsaw but it is hard to gauge exactly how important it is economically.”
But the numbers that are available are staggering. In 2013, it saw sales of almost $250 billion across all of its sites, more than Amazon and eBay put together, representing around 3 per cent of China’s entire GDP for the year. Its sites account for 60 per cent of packages delivered in China and McKinsey expects Chinese e-commerce to be a $420 billion industry by 2020, up from $210 billion in 2012 – not a bad prospect for the dominant player.
The company has been a phenomenon of the internet age as it swiftly embraced a nation slowly awakening to consumerism and the potential of online. It was founded by charismatic former English teacher Jack Ma in 1999, as he turned his home into a temporary office, nicknamed his staff after martial arts characters and set about changing the nation.
The tai chi devotee, intent on challenging eBay, created marketplace Taobao and Tmall.com, before quickly recognising that catering for the customers’ needs at every point of their online purchase would engender loyalty. The start-up launched an electronic payments arm, an online investment fund, cloud computing and mobile services.
Alibaba is frequently likened to Amazon and Mr Ma’s ability to broaden and manage its business model echoes the strategy of its founder Jeff Bezos. In his book, The Everything Store, author Brad Stone writes: “Bezos is like a chess master playing countless games simultaneously, with the boards organised in such a way that he can efficiently tend to each match.” Mr Ma shares a similar ethos, remaining hands on despite his technical retirement last year.
In the run-up to the company’s IPO, it has embarked on a spending spree – venturing into media, entertainment and football, with a stake in Guangzhou Evergrand FC. But entrepreneurial online start-ups do not always make for popular, stable public companies.
TechMarketView analyst Richard Holway says: “The real problem with digital companies is that some are going to do unbelievably well but you have to kiss a large number of frogs before you kiss the prince. Many companies fail to live up to expectations. Even with the FTSE touching a high this week, the tech stocks were still considerably down.”
Mr Holway points to misconceptions around the pricey valuations of UK online floats this year – including white goods site AO and Just Eat. “They are not tech investments, they’re relying on the conditions in the fridge and takeaway markets, not advancing technology.” Former stock market darling Asos, too, has upset investors this year following a profit warning amid widespread discounting and an arson attack at its Barnsley warehouse, which exposed shareholders to the vagaries of online retail.
The stringent requirements to list in China have enticed Alibaba’s peers to seek a US listing however expansion abroad can prove a tricky game. Walter Price, manager of the RCM Technology Trust, says: “The efforts of many Chinese companies to compete outside their home market haven’t been very successful.
“Baidu has tried in Japan; that has not worked and it is still investing in niche products in Brazil. Ten Cent is probably the most successful, with about 100 million users for its ‘We Chat’ application outside of China.”
Ultimately the frisson of excitement around Alibaba’s float and the efforts of stabilisation agent Goldman Sachs are likely to ensure a smooth start to public life. However, with uncertainty hanging over tech stocks worldwide and Alibaba’s margins as it fights for market share, the future remains far from clear.
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