In what could be the largest tech IPO in history, the buzz surrounding Alibaba’s big debut is absolutely deafening. Here’s how you might want to play it instead…
Alibaba big. Scary big.
One NYU Professor pegged China’s largest e-commerce company at a staggering $142.6 billion, or roughly $60 per share ahead of its upcoming initial public offering.
According to its filing with the Securities and Exchange Commission on May 6, Alibaba’s Gross Merchandise Volume (GMV) amounted to almost $250 billion in 2013, with around 231 active buyers per year making well over 11 billion orders annually. As such, the company’s activities make up over 76% of the total GMV of China.
It’s C2C-site Taobao is China’s largest, cornering 95% of the Chinese market. On the B2C side, Tmall.com controls 51% of the space in China.
Measuring the value of all the goods sold on its platforms, Alibaba is larger than eBay and Amazon combined.
The sheer size and growth potential of Alibaba has the rumor mill churning over just how much the offering can raise when it finally launches this summer.
Word on Wall Street is that the IPO can pull in anywhere from $15 billion – $20 billion, with the top-end valuation making it the biggest ever for a tech company.
But even with such lofty expectations…can Alibaba truly live up to it?
Beneath all the hoopla, there’s a growing concern that Alibaba may perform the way Facebook (NASDAQ:FB) did when it first went public in 2012.
Facebook’s stock tanked in the months following its IPO, but has since rebounded on the strength of its ad revenue strategies.
But not all companies are able to recover like Facebook has.
Alibaba is getting much the same hype, yet it faces a variety of risks that investors need to take into consideration.
The Alibaba Headwinds
Though the Company is being floated in New York, a critical arm of the business, AliPay, is not.
The online-payments system was spun out of the parent Company back in 2010 and is being held by a sister financial firm also controlled by Alibaba owner Jack Ma.
With Alibaba being a foreign (Cayman-registered) entity, there’s a possibility that Chinese regulators may not permit the re-acquisition of a domestic company like AliPay.
Should that be the case, it can have a serious impact on Alibaba’s ability to manage its online transactions and Internet finance needs.
Another concern is that Alibaba’s board of directors is comprised of Mr. Ma and a consortium of handpicked insiders, which allows the group to control the board without owning a majority of the shares.
This was the big reason why the Hong Kong stock exchange rejected Alibaba’s IPO last year, but was an exception made by both NYSE and NASDAQ to try an woo such a lucrative deal.
Competition is also heating up from rival Chinese companies Baidu (NASDAQ:BIDU) and Tencent (HKG:0700), especially in the mobile marketplace, as shoppers are increasingly using their smartphones to conduct their online transactions.
In its filing, Alibaba acknowledges that “we face a number of challenges to successfully monetizing our mobile user traffic.”
This comes in the midst of a major acquisitions race, as China’s Big 3 are all diversifying into one another’s specialties, such as social networking, group-buying, online games, video streaming, etc.
Last but not least, like most other Cayman Island vehicles, investors’ ability to protect their rights through the US Federal Court system may be limited.
With these potential obstacles making some investors critical of Alibaba’s future, a backdoor play might be the safer bet at this time.
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When Alibaba finally goes public, investors in Yahoo! Inc. (NASDAQ:YHOO) are all but certain to be rewarded financially.
The question is, in what ways.
As part of the 2005 technology and patent licensing agreement when Yahoo first invested $1 billion for a 40% stake in Alibaba, Yahoo was required to sell back portions of its shares to Alibaba over time.
In 2012, a 17% stake was bought back by Alibaba for over $7.5 billion in cash and stock, leaving Yahoo with 523.6 million shares of Alibaba remaining.
Presently, that remaining stake is worth north of $26 billion.
Yahoo is planning to offload 40% of what it has left on the day of Alibaba’s IPO, which is expected to raise around $10 billion for the search engine giant.
In turn, the $10 billion cash injection will more than double Yahoo’s cash reserves and give President and CEO Marissa Mayer breathing room to improve her Company’s profitability.
Since landing the top job nearly two years ago, Mayer has struggled to produce any meaningful profit or revenue growth for Yahoo. With an extra $10 billion on hand, she’ll have more leverage.
According to Mayer, “We know this [Alibaba IPO] is of critical importance to our investors — how any proceeds are handled. We intend to be good stewards of the capital. We have been good stewards of the capital to date.”
Speaking at a Tech Crunch conference in early May, she indicated a value strategy that was similar to her first Alibaba stock sale, which was to allocate the majority of the funds to a stock buyback, and a smaller portion to acquisitions.
Evidently, a shrinking stake in Alibaba means Yahoo can’t ride the coattail of a cash cow for much longer.
But if Mayer can find ways to crank up revenue with her pending windfall, Yahoo could end up being an even bigger story than Alibaba in 2014.