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As we predicted on 18 March, Alibaba, the mainland China mega e-commerce company, has filed its initial paperwork for an IPO in New York. Although it is not clear on which exchange the shares will trade, insights and expectations, both positive and negative, are running high.
Positive Insights and Expectations
The primary focus of positive expectations is on just how high the valuation, of what is already the world’s largest online marketplace, will be post-IPO. You think Amazon is big? You think eBay is big? You’re right. But Alibaba’s 2013 online revenue of $248 billion was 30% higher than Amazon and eBay – combined!
Alibaba said that it hopes to raise at least $1 billion, which is interesting, because the company does not need an influx of cash for any of the usually obvious reasons. In fact, with a 50% profit margin, it’s difficult to understand why the company needs the cash at all. The word “dominance” does, however, come to mind. I’m just not sure how broadly that word should be interpreted. At any rate, market gurus believe that the $1 billion cited by the company is just a number for paperwork purposes. The general expectation on the street is that Alibaba will sell in excess of 200 million shares, a quantity that could result in a valuation of more than $18 billion, breaking the record set by Visa in 2008.
Yet other observers wonder what the IPO means for Yahoo!, which owns a 26% interest in Alibaba. Sky News reported that, “Alibaba’s success has provided a financial lifeline for Yahoo!, whose stake in the Chinese company is the main reason its own stock price has more than doubled in the past two years.”
Where’s the Downside?
It may be subtle, but it is real. There is only so much money to go around.
Let me explain it with this real-life illustration. A few months ago, a church in my area announced that it was going to hold a spaghetti dinner fundraiser for two gentlemen who wanted to go on a mission trip. The dinner was to immediately follow the Sunday morning service on the given date. Of course, a financial goal was set, based upon the expected expenses of the trip. The dinner was well attended and the financial goal was met. But, the next day, an unintended consequence was discovered when the church offering was counted. It was down from its usual amount by almost exactly the amount of funds raised at the dinner.
Jim Cramer tweeted this morning: “Let me be very clear: there is not enough money to handle the Alibaba deal right now. It will cause selling in most high growth stocks.”
Investors hungry to join Alibaba’s band have got to pull their money from wherever it is now. With this much on the line, we may see some other stocks in a precarious position as investors redirect their funds. There is, in my humble opinion – and in Jim Cramer’s (I’m not sure if his opinion is humble or not) – the potential for a crippling disaster in the markets as a side effect of the Alibaba IPO.
If that is not sufficient reason for concern, you should know this: Alibaba is NOT China’s largest internet firm. That title goes to Tencent. It may be that we are a few months away from two firms, heretofore unknown to most of the world, geographically speaking, reinforce their positions for worldwide dominance of the e-commerce and cyberspace. You can bet that, should the Alibaba IPO be wildly successful, a Tencent IPO may not be far behind.
The Alibaba IPO could become the biggest story of any kind in 2014.
