"China's Amazon" IPO Frenzy

Here Comes the Biggest IPO Ever

Written by Adam English
Posted March 18, 2014

I've been avoiding tech IPOs in recent years for the same reason I avoid casinos and strip clubs.

The people running them are shifty, and they all seem like a play on greed and lust to separate my money from my hand.

Facebook languished for over a year until they started improving revenue. Now a user backlash is swelling from advertising and data mining efforts.

Wasting $19 billion on a free texting service reeks of desperation for fresh eyes to parade featured content past.

Twitter slid for a month but popped up above the initial price. Now user growth has slowed and ad revenue is in question. Even after more than doubling revenue in the fourth quarter, it is still unprofitable.

Then there is Groupon. Who would have thought trying to cook the books by counting 100% of the face value of the coupons it sold as revenue would backfire? Any sucker that bought into that hype is down 68% in a year and a half.

Frenetic growth is great if you have something to sell and strong growth potential. Social media collapses just as fast as it takes off, though.

The only ways to make more money from advertising — increasingly intrusive ads and heightened privacy concerns — accelerate the process.

I have no desire to assume there will always be a greater fool that thinks the services they use can make them money in the market.

Having said that, there is one tech IPO I'm sold on, hook, line and sinker. People call it "China's Amazon," but that hardly describes it.

The Biggest in the World

Alibaba, although it has gotten plenty of press in financial news, is completely off the radar for Western consumers. It almost exclusively operates in China.

It is a privately owned Hangzhou based group of e-commerce businesses. Founded in 1999 as a business-to-business platform to match domestic manufacturers with foreign buyers, it has grown at an astronomical pace into just about every type of online activity.

Amazon has nothing on this beast of a company. Alibaba's companies handled more than $170 billion in sales in 2012, more than Amazon and eBay combined.

Here is a short rundown of it's major companies and affiliates:

  • Alibaba.com — The world's largest business-to-business trading platform for small businesses, operates in 240 countries and regions.
  • Taobao — China's largest consumer-to-consumer online shopping platform. $160 billion in sales in 2012 and the third most-visited website in China.
  • Tmall.com — Five years old and the eighth-most visited website in China. Caters to affluent Chinese with high-end global brands.
  • Juhuasuan — A group shopping website offering “flash sales” with limited time frames.
  • Etao — Shopping comparison web site that searches for prices and coupons and finds the best deals for an item.
  • Alipay — A third-party payment platform with 300 million users and control of just under half of China's online payment market. It provides an escrow service where consumers can verify if they are satisfied before releasing payment.

It also has a presence in cloud computing, online media production, it's own messaging application, and a strategic partnership with Yahoo that included acquiring China Yahoo.

This is going to be the biggest IPO in history, and you'll probably never see such a developed business appear again.

Why I'm Sold

Getting back to my aversion to recent tech IPOs, none of this would matter if it can't pull in a profit (except for early investors that cash out).

There is massive growth potential. The total value of online transactions in China grew from virtually nothing to about $700 billion in five years.

Alibaba is making money off this in every way imaginable.

Taobao, the consumer-to-consumer platform, makes money because merchants pay to advertise and stand out amongst several million competitors. Like Google, these ad buyers stand out through Taobao's own search engine. Growth has been, and will remain, exponential.

Tmail and other platforms make money from the sale of brand name goods from commission fees and deposits.

In the three months through September (the most recent info available) Alibaba's revenue rose 51% to $1.78 billion from a year earlier. Net profit stood at $792 million, giving the company a net profit margin of 44.6%.

More importantly, 40% of Chinese consumers plan on buying a smartphone within the next 12 months and are buying more and more through mobile devices.

Only 45% of China’s population is online. In just the last year, 54 million new users were added, mainly just through mobile devices.

Alibaba already has captured 45% of Chinese e-commerce, and Chinese demographics and behavior only reinforces my sentiment.

Young, Rich, and Financially Secure

Thanks to the almost obscene growth rate in China in past years, Chinese society is inverted compared to what we see in the Western world.

Young people are now highly educated and have vastly improved job prospects. As a result, they have much better chances of landing jobs that aren't in a factory for bargain bin exports.

The people who are adopting mobile payment and shopping the easiest and fastest are making far more than their parents:

us and china income by age charts

Among emerging markets, Chinese consumers are even saving money at an incredible rate while buying more and more.

Unlike the stagnant wages, massive credit obligations, and failing job prospects in the West, Chinese growth and overall wage growth is allowing incredible saving rates.

Short-term economic troubles won't immediately spook young mobile buyers and hit sales or revenue. Over time, the savings will translate to greater wealth, creating greater purchasing power and thus sales potential.

What to Watch

The IPO was just announced and is still in the nascent phase of the process. Alibaba is in discussions with six banks to underwrite the deal.

Analysts estimate the company has a value of at least $140 billion, and the IPO proceeds could exceed $15 billion. If this holds, it'll be the biggest IPO ever.

There is some concern about Alibaba's competitors, though I feel it is a little overblown.

Last year, Alibaba lost some market share. JD.com made up some ground, but only accounts for 14% of market share as compared to Alibaba's 45%. The year-to-year change was about 1%.

Alibaba has already stated it plans on using the money it raises for new acquisitions. This is on top of $2 billion spent acquiring small firms to shore up any potential weaknesses.

And with China's internet retail market expected to triple from 2012 to over $300 billion in 2018, there is plenty of new market share to capture.

We could see IPO documents released as early as April. The IPO itself should happen before the end of the year.

Until then, we're stuck in a bit of a quandary. Virtually everything else in the stock market looks overpriced and is overly dependent on a change in the stagnation we've seen over the last five years.

I wish I saw more potential in U.S.-listed stocks today, but I'm with Nick on this: You're best bet is to look to some alternative, contrarian plays to thrive in this market. 

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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