The biggest coming-out party of a technology company could be happening soon and the public is invited. Alibaba Group teased investors with a sneak peak at its more-than-impressive earnings from the vast but still growing Chinese online marketplace as the company filed Tuesday, May 6, its long-awaited plan to sell shares to the public.
Alibaba, which controls more than 80% of the e-commerce market in the world's second largest economy, initially raised $1 billion, but analysts believe the figure is only a placeholder and the final amount is far higher than that. It so high, in fact, that Alibaba is expected to raise upwards of $15 billion and could potentially surpass Facebook's $16 billion debut in 2012.
As part of its initial public offering, Alibaba released its latest financial statement, whose contents, although wanting, have no doubt caused a stir on Wall Street. In 2013, the company handled more than $248 billion worth of transactions on its online marketplace, a figure far higher than Amazon and eBay's transactions combined. It also saw its monthly active buyers rise 44% to 231 million in the last fiscal year, a number which Alibaba predicts will continue to soar as more than half of the Chinese population still to go on the Internet.
Perhaps more exciting news for investors is Alibaba's whopping revenue growth rate of 57% in the first nine months of fiscal year 2013. Not even Facebook, currently touted one of the most successful technology companies that have gone public, can match that rate. At the end of December last year, Alibaba posted an annual revenue of $6.5 billion, which is not much compared to how much the likes of Facebook, Amazon and eBay make every year. However, net income for the same period was $2.9 billion, which is equivalent to 44% or nearly half as much of all revenue, a profit margin far higher than that of any U.S. or Chinese online company. These strong figures, analysts believe, will generate a valuation of $200 billion for Alibaba.
"If it is able to transport that kind of power to outside China, it has the potential to become a true global e-commerce powerhouse. Everybody thought Amazon could do it but now we have to rethink Amazon in the light of being the most successful company in that field in the U.S. - but not in the world," says analyst Roger Entner, founder of Recon Analytics.
Still, Alibaba's initial filing is not without gaps. The Chinese firm makes the bulk of its money from two major Chinese e-commerce websites, Taobao Marketplace and Tmall, but Alibaba does not provide a breakdown of its revenue or earnings from the two marketplaces. However, it did say that the company's earnings from both websites accounted for 83% of its total revenue or $5.4 billion in the last fiscal year.
In the last quarter of 2013, 19.7% of the value of goods sold on Alibaba accounted for goods sold on mobile, a considerable increase by 7.7% from the same period in 2012. The company did not provide further details, however.
"People want to know what the breakdown is across the various units. Hopefully, as we get closer to the IPO, we might see some unbundling," says Brendan Ahern of KraneShares.
It is interesting to note that investors will not have full access to Alibaba's Chinese assets, including Taobao and Alibaba.com, as the company uses a variable interest entity (VIE) structure. The VIE was created in 2000 to circumvent the Chinese government's mandate that prohibits foreign investors from investing in Chinese assets. In a VIE, an investor holds special controlling interest that is not based on voting rights. In this case, co-founders Jack Ma and Simon Xie will own most of Alibaba's Chinese assets.
The structure, although it could prove lucrative for Ma and Xie, is known to be riddled with holes. Since VIE is clearly a workaround on the foreign investments ban, the Chinese government could potentially declare it illegal, this is not without precedent.
In 2011, the Chinese merger control authority prevented Walmart from using a VIE to acquire controlling shares in an online Chinese retailer. In 1994, China Unicom first used a VIE to raise more than $1 billion, but was declared illegal by the Chinese government, forcing the company to back out of its IPO.
Alibaba has openly acknowledged this risk, saying in its filing that "there are substantial uncertainties regarding the interpretation and application of current and future PRC (People's Republic of China) laws, rules and regulations."
