With the filing of the first documents for its initial public offering (IPO) behind it, Alibaba Group Holding Ltd. offered the first view of its size, finances and profitability. The Chinese Internet e-commerce giant quite simply dominates e-commerce in China.
Alibaba’s filing showed that it has some 231 million active buyers and 136 million wireless or mobile users. The filing indicates that it does much more business overall than Amazon.com Inc. (NASDAQ: AMZN) and eBay Inc. (NASDAQ: EBAY), two of the giants U.S. e-commerce. It is also more profitable than either, but what stands out somewhat alarmingly is that Alibaba’s revenue is considerably less than its U.S. counterparts.
While Alibaba’s filing with the Securities and Exchange Commission says it expects to raise $1 billion, that is a number to ignore. It will state a real aggregate dollar amount for the offering later on. Alibaba really is expected to sell at least $20 billion in shares, which would make its IPO the largest ever in the United States, beating Visa Inc.’s (NYSE: V) $19.65 billion IPO in 2008. If all goes well, the IPO will happen this summer or early fall.
What one learns from the prospectus is that Chinese corporate law, and the government’s with it, are incredibly complex. Alibaba is incorporated in the Cayman Islands. Its Chinese assets are owned by a series of companies mostly owned by Chairman Jack Ma, who started the company in his Hangzhou apartment in 1999. That is because Chinese law forbids foreign companies from owning Chinese assets.
Another issue that investors should consider regardless of this filing, and unlike in eBay or Amazon, Yahoo! Inc. (NASDAQ: YHOO) is a sizable owner and beneficiary here. Yahoo! is also expected to be a seller of shares, which will bring in billions of more dollars for the company to use to bolster its balance sheet, buy other companies or use for dividends and/or stock buybacks. Yahoo! was shown to own some 523 million shares, or 22.6% of the company.
What really stands out is that Yahoo! shares were smacked after the filing broke. In fact, the shares were down 6.5% at $34.12 in mid-morning trading on Wednesday. That might have been the expected reaction from really good traders after the Alibaba IPO priced, but not when the filing broke.
Here’s what else investors should know: Alibaba is not really the Amazon.com of China. It is more like eBay, where the platform lets buyers and sellers meet and agree on a price. The heart of the business lies in three marketplaces. Its Taobao Marketplace is China’s largest online shopping business. Its Tmall site is the country’s largest third-party platform for brands and retailers. Juhuasuan is China’s most popular group-buying market place. It also has a fast-growing payments operation Alipay. Its gets most of its revenue from fees sellers pay to list their products and services. It also gets fees from sellers who want their names to appear at the top of search queries. In that respect, it is like Google Inc. (NASDAQ: GOOG).
Alibaba could be the second-most valuable Internet company. The company valued itself at roughly $109 billion in April, but Bloomberg News recently valued the company at $168 billion. If the IPO produces a valuation that big, it would make Alibaba the most valuable Internet company after Google. This would also give Alibaba a larger market cap than most Dow Jones Industrial Average components. Amazon.com’s market capitalization was recently reported as $136.8 billion, and eBay’s market cap was $64.6 billion.
The Chinese e-commerce player’s profit dwarfs Amazon.com’s and eBay’s. The Chinese player earned some $1.35 billion in the October-December quarter, up 100% from a year earlier, and $3.5 billion for the first three quarters of its fiscal year, which ended in March. Amazon reported $274 million in net income for all of 2013. eBay’s net income was $2.86 billion.
Alibaba is not global — yet. But it wants to be. Some 87% of its transactions take place in the People’s Republic of China, where there are some 231 million active buyers and 131 million mobile users. It was responsible for 70% of China’s total package deliveries in 2012, according to Bloomberg, and generated 2% of China’s total gross domestic product (GDP). Wal-Mart Stores Inc. (NYSE: WMT) generates around 0.3% of U.S. GDP.
The size differential stands out as well. Alibaba has a surprisingly small number of employees, only 20,884 according to its prospectus. Amazon.com employs some 117,300, and eBay has some 33,500 employees, but Amazon and eBay operate all over the world. Each, in fact, generates more than half its revenue from outside the United States.
Alibaba is excellent at defending its turf. eBay tried to establish a foothold, but Alibaba’s competitive response was so intense that eBay shuttered the business. Amazon.com is investing heavily to build its business in China, but it is nowhere near the powerhouse that it is in the United States and Europe.
Caveat emptor! Alibaba’s shareholders will have little ability to influence company policy. All of the power will rest with the company’s management. It is not clear that a judgment in a U.S. court against the company could be enforced. But the company concedes that a big risk is just dealing with Chinese law and politics.
According to the prospectus, Chinese regulations “specifically prohibit Internet activities that result in the dissemination of any content which is found to contain pornography, promote gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC or compromise State security or secrets.”
One last consideration here is that Softbank is an even larger holder than Yahoo! Softbank’s stake is more than 797 million shares, which will give the Japanese investment giant much more new capital to put to work.