THE initial public offering of shares in Alibaba, due shortly on the New York Stock Exchange, may raise more than $20 billion, making it one of the biggest IPOs on record, and value the Chinese e-commerce firm at $150 billion or more. But is it worth it?
There are certainly reasons to believe so. The firm dominates online shopping in China, which has passed America to become the world’s biggest e-commerce market. In terms of gross sales, Alibaba is bigger than eBay and Amazon combined. And unlike Amazon, Alibaba makes significant profits. Bolstering the case for optimism is the firm’s recent performance. Revenues shot up 46% in the second quarter, year-on-year, to top $2.5 billion; and profits almost trebled to $2 billion.
There were worries, as there had been about Facebook, that Alibaba might stumble in the transition from desktop computers to mobile devices. This would be disastrous, since m-commerce is taking off spectacularly in China (see chart). However, just as Facebook’s switch to smartphones and tablets has gone better than feared, Alibaba has quickly mastered the mobile internet too. According to iResearch, a consulting firm, over four-fifths of all m-commerce in China now takes place on Alibaba’s mobile platforms. Nearly a third of the firm’s transactions, as measured by the value of the goods, now take place on mobiles, up from just 12% a year ago.
All this should be enough to ensure that investors pile into Alibaba’s shares when it floats. After the champagne stops flowing, though, they should reflect on the fact that maintaining Alibaba’s dominance in China is going to get harder.
One threat comes from Baidu, China’s dominant internet-search engine, which is making a big push into online-to-offline services, or O2O—the use of the internet and mobile devices to promote sales in physical outlets. This week it announced a $10m investment in a Finnish mapping company whose technology uses the Earth’s magnetic field to map the insides of buildings precisely: imagine it detecting that a shopper has reached the detergents aisle of a supermarket, and pinging her some coupons. Baidu also unveiled a simpler version of Google Glass, its American counterpart’s smart specs: BaiduEye, as it is called, could for instance identify the fancy pair of shoes that a wearer is looking at, navigate automatically to the e-commerce site with the best price for them and let him buy them by voice command.
Another threat to Alibaba comes from WeChat, a hugely popular messaging app owned by Tencent, another internet giant. WeChat has also pushed into e-commerce: it has been particularly successful in selling such things as smartphones made by Xiaomi, a rising Chinese maker. Tencent has also taken a stake in JD, yet another e-commerce firm that is chasing Alibaba.
Now, a surprising new entrant has joined hands with both giants: Wang Jianlin, who last year was reported to be China’s richest man, though he may lose that title to Alibaba’s founder, Jack Ma, when it floats. Mr Wang is known locally for his political astuteness, which has helped him build a property and retailing empire. He also made a splash overseas with his $800m acquisition two years ago of AMC, a big American cinema chain.
Dalian Wanda, his firm, has just launched an e-commerce joint venture with Tencent and Baidu. The idea is that customers will use Baidu’s maps and Tencent’s apps to find deals at Wanda’s many hotels, shopping centres and cinemas. Hans Tung of GGV Capital, a venture capitalist who was an early backer of Xiaomi, is sceptical, arguing that bricks-and-mortar retailers have typically made a hash of O2O efforts in China. He points, for example, to the unimpressive attempts by Suning, a big electronics retailer, to fight back against competition from JD. But Mr Wang has deep pockets, and has pledged that the joint venture will invest 5 billion yuan ($813m) over the next few years to establish itself as a force in e-commerce.
As the competition has intensified, Alibaba has gone on a spending spree, buying firms, or stakes in firms, in areas ranging from video to mapping, from logistics to sports (see table). Not only should potential investors worry about the cost—$5 billion so far this year—but they might also wonder about the haste in which some deals are being done. Last month Alibaba disclosed suspected accounting irregularities at a film-production outfit it had bought for more than $800m.
Duncan Clark of BDA, another consulting firm, argues that such mishaps are worth risking because the real danger is that Alibaba misses the next disruptive trend—and such frenzied dealmaking helps its managers keep a finger on the technological pulse. Others are less forgiving. “There are concerns about whether the firm has done sufficient research about potential targets,” insists Zhu Lei of Jiaotong University in Shanghai. She points as an example to Alibaba’s curious purchase of half of Guangzhou Evergrande, a Chinese football club, reportedly as a result of an agreement struck by Mr Ma during a night drinking with the club’s owner.
Such concerns are unlikely to dampen the enthusiasm of investors when Alibaba floats. They will be fixated on the scale of the opportunity for Alibaba to keep growing as China’s middle classes swell. This is a business with a first-mover advantage, and Alibaba’s rivals, while growing fast, are still far behind it. But those tempted to grab its shares at any cost should just remember, as Mr Tung puts it, that “While Alibaba is in a great position, it is no longer a ‘winner take all’ play.”