Alibaba IPO Set to Be the Biggest Ever. What's Behind the Hype?

By Cronan, Bryan | The Christian Science Monitor, September 19, 2014 | Go to article overview

Alibaba IPO Set to Be the Biggest Ever. What's Behind the Hype?


Cronan, Bryan, The Christian Science Monitor


Investors are clamoring to get a piece of Alibaba, the online shopping website based in Hangzhou, China, often referred to as "China's Amazon."

Interest is so high that when Alibaba begins trading in the US Friday, a whopping $21.8 billion could rapidly change hands on the New York Stock Exchange. If underwriters decide to issue another 48 million shares on top of the 320 million already planned, the initial public offering would reach up to $25 billion - the largest in history, beating out the record $22.1 billion IPO of Agricultural Bank of China Ltd. in 2010.

Investors are excited by the prospect of finally having a way to profit directly from the online shopping potential of China's burgeoning middle class. But Alibaba, which will trade under the ticker BABA, represents an even bigger step for Chinese tech companies.

"Alibaba's IPO could well be the end of US dominance in the world technology sector," Qing Wang, a professor at Britain's The University of Warwick, said in an e-mailed statement. "Alibaba's annual growth rate of more than 30 percent shows that the gap between the Chinese companies, Alibaba and Tencent, and US companies is getting ever closer. In fact, with Alibaba's imminent listing, the Chinese internet companies are already sharing the top four spots with the US."

Investors believe that the company poses a threat to US-based online retailers Amazon and eBay because it can provide lower prices due to its access to cheaply made Chinese goods. That could spur customers to chose it over its competitors.

"It's hard to find it cheaper than on Amazon," Martin Pyykkonen, now an analyst at Rosenblatt Securities, told Bloomberg in 2013. "If Alibaba could come in and, at least for Chinese-made goods, offer a cheaper price, that's interesting. That might be their edge."

Compared with the US giants of e-commerce, Alibaba has relatively low revenues. The company only made $8 billion in revenue in 2013. EBay made $16 billion and Amazon made $75 billion during the same year. The figure seems so low because it only accounts for the commission and fees Alibaba takes on sales. A better measurement is to look at the $248 billion in merchandise sold through various properties - double that of Amazon. In the second quarter of 2014, the company recorded $2.5 billion in revenue, a 46 percent increase over the previous year.

"Alibaba continues to innovate in many areas of their business to keep existing customers happy and attract new customers," Mr. Wang said. "This ability to understand customers intimately and continuously innovate should enable them to expand overseas with US dominance in the world technology sector gradually being broken."

Beyond the lure of buying into the huge company, some investors are betting on Alibaba's founder, Jack Ma. Many credit Mr. Ma, a former English teacher, with Alibaba's success and innovation. From a one bedroom apartment in 1999, Ma and 17 colleagues founded Alibaba to help small businesses sell products. It has since become one of the largest online retailers in the world. …

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