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Alibaba's business model and the Chinese market make its IPO hot

Michael Kan | May 8, 2014
Alibaba's IPO in the U.S. could surpass the US$16B offering from Facebook

Alibaba Group is the e-commerce player from China that you may have never heard of. But it's set to make one of the biggest initial public offerings in the U.S., possibly raising over US$20 billion, analysts say.

Why the company has been getting so much buzz was highlighted on Tuesday, when Alibaba filed its IPO documents. The contents reveal an e-commerce player selling more merchandise than eBay and Amazon.com combined, and primed to see surging financial growth from a still-developing Chinese market. Here are some details from Alibaba's IPO that show the company's prospects and upcoming challenges.

How big is Alibaba?

The company's presence on the world stage can't compare with the global user base of Google and Facebook. But the sheer scale of the Chinese market has been enough to turn Alibaba into an Internet giant on par with U.S. tech companies.

By value of merchandise traded, Alibaba claims to rank as the world's largest e-commerce company, trading goods worth $248 billion last year, the IPO filing said. Driving the purchases were Alibaba's 231 million active buyers. The 20,000-person company not only runs Taobao Marketplace and Tmall, two of China's largest online retail sites, but also platforms for wholesale trading. In addition, the company's affiliate Alipay is China's largest third-party online payment service.

Thriving from indirect sales

The Chinese e-commerce giant often gets compared to Amazon. But a major difference between the companies is that Alibaba doesn't sell its own inventory of goods. Instead, it manages the online marketplace for merchants to connect with consumers.

To earn revenue, the company charges fees to help merchants market the retail sites, and takes a commission for products that are sold. The business model means that while Alibaba generates less in sales, the company makes more in profit. For the last nine months of 2013, Alibaba's net profit was at $2.9 billion. In contrast, Amazon's net profit for all of last year was at $274 million, while eBay's was at $2.8 billion.

Potential for growth

One of the reasons investors are excited is that Alibaba has plenty of room to grow in China. The country has 618 million Internet users, and half a billion of them are going online with their phones, according to the China Internet Network Information Center. But total Internet penetration in the nation still remains at only 46 percent.

Alibaba's IPO filing showed that the company is growing at a breakneck pace. Net profit for the last nine months of 2013 was up by over 400 percent year over year. Furthermore, the company's active buyers ballooned by 71 million over the course of last year.

Mobile

One challenge facing the company is popularizing e-commerce on the smaller screens of smartphones. As of December, Alibaba had 136 million active mobile users. But of the $248 billion in goods traded on Alibaba's retail sites last year, only about 15 percent was bought by users on mobile devices.

 

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