IPO Of Alibaba – success story
Investors love a good story.
They lined up hundreds deep at the Waldorf-Astoria hotel in New York earlier this month to hear Alibaba’s executive chairman, Jack Ma, promote the Chinese Internet retailer’s initial public offering.
“It was a zoo,” said Vincent Rivers, senior portfolio manager for the London-based investment firm J.O. Hambro Capital Management. “There must have been 400 people waiting in line. Everybody was there. It was like a social event.”
The shy, somewhat awkward Ma opened by saying that he’d first come to the United States 15 years ago looking for about $2 million in capital. “Now,” he said, “I’m asking for slightly more.”
The line drew a knowing laugh from the crowd – Alibaba was asking for nearly $22 billion, the biggest IPO ever in the United States – but Ma should probably keep his day job. What the crowd really wanted to hear was Alibaba’s growth story, and Ma didn’t disappoint them.
A few vivid charts and statistics told the story. Alibaba is already the world’s largest Internet commerce company, with 231 million active buyers using its site, 11.3 billion annual orders and $296 billion in annual merchandise sales, a measure Alibaba uses instead of revenue.
To put this in perspective, Amazon has less than $82 billion in revenue. EBay has just more than $17 billion.
But what excites Alibaba’s potential investors isn’t only its size, but also its prospects for getting bigger. China currently has 302 million Internet shoppers. That’s less than half the country’s 618 million Internet users. And Internet penetration in China is less than half the country’s population of about 1.35 billion. Competition from brick-and-mortar retailers in China is far less than in the United States, which should also drive increases in Internet shopping.
“The potential is absolutely massive,” Rivers said. “The real question isn’t whether they’ll have more users. It’s how much will they spend.” Chinese Internet shoppers spend far less per person than in the U.S. “If you look long term and they can close that gap, you can get to some huge numbers,” he said.
Alibaba also has enviably high profit margins of more than 40 percent, which even by Internet standards, let alone retail, is extraordinary. Amazon has struggled for decades to eke out a slender profit. EBay has an operating margin of 20 percent and Google 23 percent.
Alibaba is the dominant e-commerce company in China by far, which, along with the high margins, suggests that it’s the kind of natural monopoly beloved by investors. Alibaba itself attributes this to the so-called network effect. “The interactions between buyers and sellers create network effects in that more merchants attract more consumers, and more consumers attract more merchants,” the company asserts in its prospectus.
And Alibaba keeps profits large by dispensing with the high-cost, low-margin businesses that have dogged Internet retailers in the U.S. Alibaba is simply a platform for connecting buyers and sellers. “We do not engage in direct sales, compete with our merchants or hold inventory,” the prospectus notes.
People started to gather on the floor of the New York Stock Exchange on Friday morning, where the excitement of newly minted billions was palpable. The Alibaba trading station occupied the center of the floor, where it was surrounded by a throng of “VIP guests” squeezed behind velvet ropes. The street outside was packed, the balconies were crowded with onlookers and cheers went up every time the indicated opening price was adjusted upward. Ma rang the opening bell and dropped in on the on-floor set of CNBC.
Alibaba was priced Thursday night at $68 a share. And Friday, pent-up demand drove the opening price to $92.70. The stock immediately rose from there.
Perhaps some stocks should reflect what we’ll call an “excitement premium,” which in Alibaba’s case is surely significant. That’s fine until the excitement wears off.
Compiled by Author –
NIRDESH SINGH, STUDENT (CA FINAL), INDUSTRIAL TRAINEE AT HSBC, GURGAON
Interests – RESEARCH, READING NOVELS, TRACKING SENSEX AND NYSE’s SCRIPS