Alibaba: A tasty dish (just don't ask how it's made)
“When you trust, everything is simple. When you don’t trust, things get complicated.” Jack Ma
Alibaba is here. Much like a pregnancy, the IPO involved years of planning, months of gestating, and, finally, weeks of mounting hype. The NYSE midwifed the offering with the utmost care to avoid another Facebook, and the result was a textbook example of a successful IPO: priced at $68 a share, opening at $92.70 a share, with strong demand throughout.
Alibaba will be a significant presence not just in the US stock market, but in the US tech industry for some time. The health of the IPO market hinges for now on its stock performance. Its domestic and international expansion will make it one of a handful of influential tech giants in an increasingly globalizing Internet. Its $18 billion cash pile will make it a sought-after investor and partner in Silicon Valley as well as Hollywood.
While many people outside of the tech world may never have heard of Alibaba before this week, they know it now because it's, well, big. The biggest IPO is US history. Bigger sales than Amazon and eBay combined. Bigger in market value than Facebook and just behind General Electric (just you wait, Immelt).
But for many in the US, whether we have a superficial idea of Alibaba as “the Amazon of China” or have bothered to try to undertake a deeper understanding of the company, Alibaba remains something of a mystery. Here is this company that just raised $22 billion and is suddenly worth $230 billion, and bulls and bears are polarized in telling you whether to invest.
And how many of them can explain what Alibaba is? The US stock market has never seen a company like Alibaba before. And, for that matter, neither has the world.
Look at what Alibaba has achieved since founding in 1999. It takes nothing away from Jeff Bezos to say that Amazon's achievements in the US pale next to what Jack Ma and his team of Lakeside Partners did with Alibaba in China. Alibaba didn't disrupt an aging commerce industry, it in essence built one from scratch. Unlike Amazon, Google, Apple, etc., Alibaba doesn't just sit in the center of an ecosystem, it is an ecosystem. An ecosytem it tightly controls, through ownership or influence.
It's tempting to explain Alibaba's success as a government-fostered ecommerce company in the world's most populous country. China has 618 million online users, 302 million of them active online shoppers. That's a huge market, and its very vastness makes it daunting to address. China has 127 cities with a population of a million or more (the US has nine).
In 15 years, Alibaba managed that feat, even though linking buyers and sellers through the country meant building a payment system both sides could trust (Alipay), a site capable of using big data to connect buyers with the products they'd want (Taobao), and a logistics system that could deliver goods with an average shipping time of three days.
The logistics piece was the most challenging, and it shows just how clever Alibaba is in growing its operations. Rather than taking on the hefty inventory costs of its own distribution network, Alibaba lined up 14 delivery partners than runs 1,800 distribution centers in China and employs 1.1 million workers. All of them were operated by China Smart Logistics, an entity 48-percent owned by Alibaba.
That's the achievement of Alibaba to date. The company built something that didn't really exist before: a commercial infrastructure that consumers and producers needed without ever knowing it, an infrastructure that had to work seamlessly or it never would have caught on so quickly on such a massive scale. Driven mostly by sales from small businesses, Alibaba handled nearly $300 billion in transactions last year to 279 million consumers.
More recently, Alibaba has been adding layers onto that infrastructure. Its 188m monthly active users spent $71 billion on transactions last year,. Mobile sales made up a third of Alibaba's total transactions last quarter, and 86 percent of all mobile retail commerce in China. Alibaba is also offering cloud services – from mobile apps to credit assessment to systems integration – to its sellers as well. And it's expanding into groceries, digital entertainment and health care.
Now consider that two valuation experts both said Alibaba's $68 offering price was reasonable, and you'd think Alibaba is the investment opportunity of the year. But you'd be wrong, because both experts – and many others studying the market – maintain there are overweening governance and management concerns that make the ADRs a risky investment.
And there the second thing that makes Alibaba so markedly different from other IPOs. Never has there been a company offered on US markets that is so extreme in both its promise and the disconcerting details of its inner workings. Much of the coverage leading up to the Alibaba IPO this week has centered on those concerns.
They aren't slight concerns either. The company's relationship with the Chinese government is opaque. Regulators can make life hard for companies, as Baidu found out a few years ago. (On the other hand, it hasn't hurt Baidu's stock, which is up 83 times from its 2005 IPO price.) Another concern is that the Chinese economy continues to look shaky.
More troubling is the byzantine corporate structure of Alibaba. To read through the S-1's description of the structure is to enter a rabbit hole of shell companies, Cayman Island- and Virgin Island-based entities, and interlocking layers of control. It seems designed to help Alibaba list in accordance with Chinese laws.
There are also the red flags surrounding Alibaba's handling of Alipay, a key part of the company's success and the entity responsible for settling payments in 78 percent of Alibaba's transactions. Four years ago, Yahoo and Softbank objected to Alibaba's spinoff of Alipay to investors, including Ma and entities he controls. Ma has said the move was necessary to, again, navigate Chinese laws. This morning, Ma swept aside questions, urging investors to simply trust him.
Alibaba is expanding its board, but the new members will be chosen by a shadowy group of Alibaba insiders known as the Lakeside Partners. The group includes many who by consensus helped bring Alibaba to where it is today, but its opaque nature raises questions about its ability to manage growth at a larger and more global scale.
But for the average tech investor, due diligence in Alibaba means either delving into arcane areas of cross-border investment laws or abandoning the tried-and-true dictum of investing in what you know. It's hard to know what's what in the way Alibaba works. And so it boils down to trusting that Alibaba has their best interests at heart.
Ma is clearly an idealist, talking at the NYSE about how his company will do everything it can to help small businesses, or urging people to follow their dreams – sentiments, really, that would normally draw laughter on the NYSE trading floor – and he may well mean it.
Alibaba the company may well be about making dreams come true for small companies. But with Alibaba the investment, we just don't know. And among investors, not knowing and simply trusting is always a dangerous proposition.