Order imbalances may have delayed Alibaba’s initial public offering for a bit on Friday (Sept. 19), but the company made a ton of money nonetheless. It’s stock price opened at $92.70 per share on the New York Stock Exchange, 46 percent higher than the $68 the company had predicted.
The influx of new capital reportedly provides the China-based eCommerce specialist with at least a $247 billion market value. By comparison, Amazon is valued at $150 billion. Alibaba’s stock closed on Friday at $93.89 per share.
So why should we care?
For one, Alibaba, and its close payments compatriot Alipay, might represent just the beginning of a migration of similar Chinese companies, such as Tencent and its payment service Tenpay, that are looking to compete for U.S. customers, not to mention those in other countries as well.
Moreover, Alipay processes more transactions in a day than PayPal does in a year. That’s also something that U.S. competitors can’t ignore.
Alibaba says growth in sales for its AliExpress online marketplace, created in 2010 to facilitate sales to overseas consumers from Chinese businesses, comes from the increasing number of buyers, particularly from the United States, Russia and Brazil. Further tapping the international market, Alibaba also launched in June an online shopping portal called 11Main.com where U.S. merchants and U.S. consumers can interact.
With billions in additional capital from its IPO, Alibaba theoretically could invest more heavily in these initiatives to drive more growth in its international endeavors.In other words, the global online marketplace and online payments sector just got a lot more competitive. With online commerce growing rapidly, aided by growth in mobile-based shopping, the question is, is there room for even more competitors to emerge to put further pressure on U.S. stakeholders?
What is Alibaba?
Alibaba connects buyers and sellers without the cost of holding inventory on its own. As such, it is a formidable competitor to brick-and-mortar retailers that must cover such expenditures through their pricing.
American audiences likely more easily associate its eCommerce and online-payment functions in terms of Amazon or eBay. Alibaba, however, is much more than an eCommerce experience for its hundreds of millions of online users, as MPD CEO Karen was told this week by Blue Snap CEO Ralph Dangelmaier and economist Vanessa Zhang of the Global Economics Group.
Dangelmaier and Digital River’s Souheil Badran believe Alibaba’s next move will to be to develop a truly global eCommerce platform, while Zhang believes it is more likely in the short term to develop its Chinese core market and develop internationally by appealing to the Chinese consumers abroad.
Alibaba is inventive, according to Zheng, and that is seen nowhere more clearly than in the development of the Alipay online-payments business. Initially designed as a solution to a problem—giving consumers a way to shop online—Alipay is now intimately tied to the complex Alibaba ecosystem and provides the synergy for it.
Alipay: what it is, and what it’s worth
The Alipay business was separated from the rest of Alibaba in 2011 because of pressure from government regulators. A deal eventually was struck whereby Alibaba was entitled to a one-time payment of up to 37.5 percent of the value of Alipay in the event that it is sold or goes public. That could mean a payout for Alibaba shareholders someday.
Alipay was launched in 2004 and is often described as the Chinese PayPal. It’s one of three third party “digital payments” providers in China. (The other two are UnionPay online and Tenpay.) With its 800 million customers, Alipay owns nearly half the online transactions in China and has nearly 6 times as many registered accounts as PayPal, 4 times that of Amazon, and about the same as Apple iTunes.
In February, Alipay reportedly said it overtook both PayPal and Square combined in mobile transactions processed at $150 billion in 2013. PayPal’s mobile volume was $27 billion, though Square doesn’t report such information publicly, according to a Business Insider article, which noted that at the time Alipay had 300 million registered users and 100 million mobile users.
Like PayPal, Alipay is a digital account that registers a funding source (usually a bank account) to that account and enables payment online by keeping the payment credentials concealed from the seller. But unlike PayPal, Alipay actually escrows the funds until buyer and seller have agreed that that the transaction has been completed and the buyer is satisfied.
As a result, Alipay has had no trouble getting consumer and merchant adoption, and that is why it is the most widely used online payment system in China. It is reported that 60 percent of the parcels delivered in China are from one of Alibaba’s enterprises. Alipay accountholders can also conduct offline transactions such as pay bills.
While prognosticators had been trying to determine earlier in the week how much Alibaba’s stock price would initially be, calculating how much Alipay is worth is much harder to calculate.
Credit Suisse had calculated a valuation for Alibaba rival Tencent’s Tenpay of $25.7 billion. Since Tenpay has about 20 percent of China’s online payments market compared with almost 50 percent for Alipay, simple math implies that Alipay may be worth $65 billion. Sanford C. Bernstein separately estimated Alipay’s value at $50 billion to $70 billion, plus an extra $25 billion to $40 billion for a small-business lending unit.
Alipay already has struck U.S. partnerships. In June, for example, Fortune reported that eCommerce processor Stripe integrated Alipay into its services, allowing hundreds of millions of Chinese Internet users to transact with merchants that use its processing services. In doing so, it helped Stripe to better compete with PayPal Braintree, also an online and mobile processor.
Size and scope
This week, it also became increasingly clear the size and scope of Alibaba’s reach, as AliExpress, the online marketplace created in 2010 to facilitate sales to overseas consumers from Chinese businesses, brought in $4.5 billion in sales fiscal 2014 ended June 30, Alibaba executives reportedly told investors.
Alibaba takes in a 4.5 percent commission on AliExpress sales and charges additionally for marketing services. The foreign-facing arm of the business doubled its revenue year over year in second quarter to $58 million from $29 million. While a rapidly growing section of Alibaba’s business, it is a small part–overall the company sold over $80 billion in goods.
That said, a small part of Alibaba’s business is still worth $4.5 billion annually, which would make it as large as Latin America’s Mercado Libre marketplace and Rakuten–Japan’s largest we shopping mall.
No easy migration
Whether Alibaba can experience the same success they have had in China elsewhere in the world is no given. While Alibaba enjoyed the largest IPO in history, it’s B2B eCommerce model continued to struggle to find a foothold in what should be a natural jumping off point in its international expansion–India.
Alibaba is not alone. Though such international players as Amazon and Walmart have made much-publicized moves on the India market this year, local payers such as Snapdeal and Flipkart reportedly have seemed curiously uninteresting in this area.
Alibaba united the fragmented retail markets of China under one banner, but the $300 billion B2B retail industry has no such clear organizing forces. It instead is a loose network of various brick-and-mortar depots. Regulatory uncertainty and infrastructure problems within India also work to dissuade large investments in the B2B market.
Revenue growth projections
The one group that couldn’t officially talk before the IPO were the big banks leading it: Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citigroup. Unofficially, sources said analysts at those banks recently forecast that Alibaba’s profit will grow from $2.3 billion in the first half of 2014 to between $6 billion and $7 billion for all of 2015, with growth continuing at 30 percent a year.
That means Alibaba’s revenue reportedly could reach $20 billion by 2016.
That should provide Alibaba a strong source of funding to do what it believes is necessary to compete globally, while also providing competitors fair warning that there’s a new potential eCommerce leader in town.