7/21/2014 6:00 PM ET|
Should you buy the Alibaba IPO?
China's e-commerce juggernaut boasts such fast growth and high margins that much of the hype surrounding its US market debut may be justified.
Ali Baba and the Forty Thieves is one of the world's most famous folk tales. Appropriately, its namesake e-commerce company has quite a story to tell to investors considering its initial public offering.
Alibaba Group Holding is China's leader in online sales. Its retail and wholesale websites and mobile apps sold an estimated $270 billion (U.S.) in goods in 2013. By helping move that much merchandise, Alibaba can claim to be bigger than eBay (EBAY) and Amazon.com (AMZN).
And unlike Amazon, which is notorious for suppressing its profits in order to invest in new businesses, Alibaba has maintained robust earnings even as it has moved into e-payment and cloud computing services.
This suggests that investors may clamor for Alibaba shares when the company goes public later this year on the New York Stock Exchange. We generally advise waiting at least 90 days after an initial public offering before buying in because that allows enough time for the hype to die down. Alibaba reportedly plans to hold its IPO sometime after the Sept. 1 Labor Day holiday.
With Alibaba’s combination of fast growth, huge profit margins and a leading position in what will one day be the world’s largest economy, however, the hype may be real.
Alibaba operates several websites, including China's largest shopping destination, Tmall. All of its sites are platforms for other sellers, so the 15-year-old company doesn’t do any direct selling or hold inventory.
Instead, Alibaba's revenue comes from transaction fees, a small but profitable part of all that shopping. Alibaba posted revenue of $8.5 billion over the 12-month period that ended March 31. That makes the company look tiny compared with Amazon ($78.1 billion) and eBay ($16.6 billion). However, Alibaba earned nearly $3.8 billion over that period, dwarfing Amazon's net income of $300 million and a $147 million loss at eBay.
Alibaba's growth may be slowing, but its growth rate still easily outpaces most companies posting that level of profits. Sales increased 55 percent in the year that ended in March; net income increased nearly sixfold over two years.
"Alibaba has a completely different model from Amazon, and that's the reason for the high profit margins," says Francis Gaskins, director of research at equities.com and a specialist in IPOs.
Alibaba can make a case that it has plenty of room for more rapid growth. The company says in its offering prospectus that only about 36 percent of China's gross domestic product comes from consumer spending, compared with roughly two-thirds of U.S. GDP. Also, the company says that fewer than half of China's 618 million Internet users are online shoppers.
Alibaba likes to say that its various components represent an "ecosystem." In addition to the retailing operation, the ecosystem includes a payment-service company called Alipay; a logistics information system called China Smart Logistics; an online-marketing company; and (like Amazon) a cloud-computing business that serves other companies’ computing needs.
One batch of red flags comes in the area of corporate governance. Alibaba founder Jack Ma and a group of insiders will be allowed to nominate a majority of the company's directors, despite the fact that Ma and his colleagues own a minority of the company's shares (even before Alibaba goes public).
In addition, the company allows Ma to make investments on its behalf. This is because Alibaba incorporated in the Cayman Islands so it could seek non-Chinese investors. But that status also meant it couldn't invest in certain Chinese businesses. The arrangements with Ma are designed to work around that potential stumbling block.
What will Alibaba shares end up costing you? A Bloomberg survey of analysts in April valued the company at $168 billion; some analysts quoted in news reports have put the value above $200 billion. The company hasn't decided how many shares it will ultimately offer, but a $200 billion market capitalization -- roughly one-third more than Amazon and three times that of eBay -- would price the company at slightly more than 50 times the prior 12 months' earnings.
That could actually be a cheap price to buy in to the Alibaba story.
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I purchased a PTZ camera from Jason Wang of Overstep Technology and KindSecurity of China via DHgate for around $750.00
They sent me a fake camera. I immediately advised DHgate upon receipt and requested that they hold the payment as per their buyers protection policy but they did nothing.
I also filed an after purchase complaint but the did nothing. They have a useless customer service manager Robert. He does not know how to prevent problems or correct them after it happens.
DHgate and Alibaba are in the same type of racket - fraud. Consumes protection does not exists except on useless paper.
But for some reason, I still don't trust them. Could be that if you're getting a $120 product for $24, you're buying a cheap knock-off? Could be just my inherent mistrust with the Chinese manufacturers, who seem to not give one bit of concern for the end product user, rake in tons of profits, treat their people, for the most part, like dirt.....and STILL won't invest in bringing in a translator who can write a set of directions in English, that can be easily comprehended!! (yeah, you know you're laughing about that too, aren't you??)
For some products, cheap knock offs might be okay for you. For what I've been searching for lately, I can find plenty of cheap Chinese manufactured knock-offs, sold by American companies, so at least I'm throwing a little bit of money back into our economy, if I purchase from them.
Instead, what I'm doing, is buying the quality items, from a reputable source, at the cheapest price possible. Takes a little more research, but at least I know I'm buying something that won't fall apart faster than the sorry instruction sheet that came with it will decompose!
Two things you have to ask yourself is...do you trust that you're getting a genuine product for so cheap? And if it turns out that someone has sold you garbage, do you trust the company to right the wrong?
I trust Amazon. I trust eBay. I cannot say I'd trust some random stranger from China that is selling me a $100 or $200 product for $25-$50.
If Alibaba can cross that trust barrier with consumers, this stock will blow up. The first time a consumer isn't taken care of, however, he/she will never come back.
I bought soccer cleats from an online store but no where did it say it was a Chinese company. It was called ussoccercleats.com, now I see they've changed it to usasoccershoes.com. As soon as I got the package it had Chinese Post written all over it and I knew they were fake shoes. Sure enough, they were so badly made and obviously fake that contacted them. They said to send the shoes back for a full refund, yeah right! I called my credit card company and got a charge back. Then the Chinese company started to harass me and threaten to ruin my credit. I told them to shove it and that was that. I still have the fake shoes sitting in my garage collecting American dust!
Bunch of thieves in China!
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