What is Alibaba?
Alibaba is a Chinese e-commerce company that provides online shopping, online payment, cloud computing, and business-to-business services. In 2012, two of its web-sites handled $170 billion in sales, more than eBay and Amazon combined, and 2% of the entire Chinese economy. In fact, four out of every five Yuan spent online in China traveled through one of their portals. By comparison, Wal-Mart had $480 billion in sales last year—3% of the US economy.
The company was started in 1999 as a way for Chinese businesses to connect with overseas partners. It’s estimated that the company is worth over $150 billion. In the coming weeks, they are planning on raising capital in the US in perhaps the biggest technology-focused IPO ever, rumored to be more than $20 billion. They’re still waiting for SEC approval.
The shares would have a quirky structure. Because of Chinese regulations on foreign ownership, investors will own shares that give then a stake in Alibaba’s profits but no control of the underlying business. Any dispute will be governed by Chinese law, which is unclear on many issues.
With 800 million workers and an economy that is still one-third agricultural, China’s growth potential is enormous. Still, the deal’s details should give investors pause.
The original Alibaba was from an Arab folk-tale. He discovers how to get into a magic cave with the phrase, “Open Sesame.” Once inside, he finds himself literally in a den of thieves. Let’s hope investors don’t make the same discovery when they open this portal.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!