“Alibaba group’s mission is to make it easy to do business anywhere”

--Alibaba prospectus

Alibaba (NYSE: BABA) created history in the world of stock markets: it’s the biggest ever IPO in the world with a whopping $25 billion, beating Visa's 18 billion (NYSE: V) and Facebook's $16 billion (NASDAQ: FB) IPO records. Alibaba has got a lot of media attention and has made headlines for more reasons than one; its phenomenal growth story, its partnership set up, its listing in the U.S. and so forth. Even so, an average investor on the streets may be less acquainted with it.

An Ipsos poll conducted for Thomson Reuters found that 88% of Americans had never heard of the e-commerce company. 

What is Alibaba?

 “Our founders started our company to champion small businesses, in the belief that the Internet would level the playing field by enabling small enterprises to leverage innovation and technology to grow and compete more effectively in the domestic and global economies.” (company site)

The story of Alibaba goes back to 1999 when it was founded by Jack Yun Ma, a former English teacher with a group of 18 people in Hangzhou, China. Today, Alibaba is the world’s largest e-commerce company in terms of gross merchandise volume or GMV (2013) and Jack Ma one of richest man in China. China’s e-commerce giant is primarily domestic in terms of its operations. The company operates on a “platform” business model for third parties, and does not engage in direct sales, nor does it compete with its merchants or holds inventory.

“The interactions between buyers and sellers create network effects in that more merchants attract more consumers, and more consumers attract more merchants. In addition, our marketplaces are interconnected in that many buyers and sellers on one marketplace also participate in the activities on our other marketplaces, thereby creating a second-order network effect that further strengthens our ecosystem.” (from the prospectus)

The chart depicts how the dynamic network operates. 

alibaba flow chart

Alibaba’s IPO prospectus reveals some interesting facts and figures about its earnings, market penetration, businesses and more. 

  • It is the largest online and mobile commerce company in the world in terms of gross merchandise volume (GMV) in 2013, according to the IDC GMV Report.
  • It operates Taobao Marketplace, China’s largest online shopping destination with a 96.5% market share in the C2C market place, Tmall, China’s largest third-party platform for brands and retailers with 50.1% share in B2C market place, and Juhuasuan, China’s most popular group buying marketplace by its monthly active users (according to iResearch, market share at the end of 2013).
  • These three marketplaces generated a combined GMV of RMB1,833 billion (US$296 billion) from 279 million active buyers and 8.5 million active sellers in the twelve months ended June 30, 2014.
  • In addition to the three China retail marketplaces, which accounted for 81.6% of the revenues in fiscal year 2014, it operates Alibaba.com, which is China’s largest global online wholesale marketplace in 2013 by revenue, according to iResearch, 1688.com is a wholesale marketplace, and AliExpress is a global consumer marketplace targeting customers worldwide.
  • The other businesses operated by the Alibaba group are aliyum.com (cloud computing), cainiao (logistics information platform), Alipay.com (Chinese version of PayPal) and Alimama (online marketing technology platform).
  • The company’s total revenue increased by 52.1% from RMB34,517 million in fiscal year 2013 to RMB52,504 million (US$8,463 million) in fiscal year 2014. (See: Alibaba's Goal: Supplant eBay, Amazon and Paypal)

Ownership & IPO

While Alibaba is “a firm everyone believes is … fairly transparent,” a U.S. listing would further boost investor confidence in the stock. – Luke Taylor

Alibaba has earned the title of the largest IPO in history, its shares soared by 38% on their debut at the New York Stock Exchange (NYSE) taking the market value of the company to $231 billion more than eBay (NASDAQ: EBAY) and Amazon (NASDAQ: AMZN) together.

There are 30 members in Alibaba partnership, of which 24 members are from the management, five members from Small and Micro Financial Services Company and one member from China Smart Logistics. There is overlap here, as two members of management are also members of Small and Micro Financial Services Company. The 30 members have the exclusive right to nominate up to a simple a majority of the board of directors, with shareholder approval coming later. This means the concentration of power rests with the few, since the person nominated will not change unless 95% shareholder votes are against it. Thus the partnership has a huge influence over the board.

Interestingly, Alibaba’s listing was proposed to be in Hong Kong and not the U.S. initially. However, the kind of partnership structure which Alibaba has did not concur with Hong Kong’s exchange regulations, while they are acceptable in the U.S. for listing. The IPO offering was managed by Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citigroup. (Related Reading: 5 Things To Know About The Alibaba IPO)

The lead founder Jack Ma owns around 8.9% of the company stock. 3.6% is with vice chairman Joseph Tsai. SoftBank invested US$20 million in Alibaba in the year 2000, not long after the company was founded by Jack Ma; it share is at 34%. In the year 2005, Yahoo (NASDAQ: YHOO) made a strategic investment in Alibaba which resulted in Yahoo owning approximately 40% of the company. In the year 2012, under a share repurchase agreement with Yahoo, Alibaba bought back 523 million of its shares for $7,082 million from Yahoo. Approximately 22% share in the company is with Yahoo.

The Bottom Line

According to Alibaba’s prospectus, “overall, online shopping, which represented 8.0% of total China consumption in 2013, is projected to grow at a compound annual growth rate, or CAGR, of 36.1% from 2013 to 2016, according to iResearch, as more consumers shop online and e-commerce spending per consumer increases.” This reflects clear room for growth. The company might experience some loss of market share with increase in competition but is likely to maintain control on 70%-80% of the online retail market. The company’s main competitors currently are JD (B2C market place) and Tencent (O2O commerce).

All has been well till now; Alibaba has made a sensational debut and is catching the retail investor’s attention in addition to institutional clients. But what matters is the future – how will the company perform, how it will tackle the growing competition along with other challenges and for how long the ticker BABA will remain attractive. 

 

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