The greatest empires were sometimes born from a simple idea, the extraordinary success of the Alibaba group is proof of this.
Alibaba is an online distribution company in China, the Chinese giant represents to date the largest IPO in the history of stock exchanges with more than 25 billion dollars raised for its listing on Wall Street
The group provides sales services from customers to customers (C to C) and from Business to Customers (B to C) through the web. Alibaba’s other services include electronic payments (Alipay), cloud computing, which are centered data and search engines for shopping.
The group was launched in December 1998 by Jack Ma and 17 other creators, from 1999 to 2000, Alibaba raised over $25 million through Goldman Sachs, Fidelity, SoftBank and other institutions. However, the company only started to generate profits in 2001.
In 1995, a former Chinese English teacher, Jack Ma, visited the United States for the first time. He had recently started a translation company to take advantage of the extraordinary Chinese boom. During his trip to the United States, one of his friends showed him the Internet and told him that everything was available on the Internet. Jack Ma then decided to search for the word “beer” and realized that no Chinese beer appeared in the results and he even noticed that there was little content on China in general, which gave him the idea 4 years later to launch his company “Alibaba”.Jack Mah, CEO of Alibaba
Today the company is valued at more than $200 billion. Among the group’s greatest successes are the launch of “Alipay”, which allows customers to receive goods ordered online, before money is transferred to sellers, but also its strategic partnership with Yahoo where Alibaba took over Yahoo China in 2005, its “cloud computing” which was established in September 2009 in conjunction with its 10-year anniversary, and finally the acquisition of the mobile phone company UCWeb in June 2014.
Among the sections that contribute significantly to Alibaba Group’s revenues, we can mention Tabao, the most popular mobile application in China and TMall, which is the largest Chinese retail platform offering goods sold directly by the brands.
Today, the Alibaba group is enjoying greater success than Ebay and Amazon. Until 2013, Jack Ma was Alibaba’s CEO, but today he is the “chairman” and one of the pillars of the group, the current CEO is Jonathan Lu. He said that the group’s success was largely due to the trust and loyalty of their clients and that this was one of the keys to the group’s success.
One year after its initial public offering, in September 2015, the share price fell by more than 30% compared to its launch, reducing the group’s value by nearly $140 billion compared to the peak reached in November 2014. This was due to rather disappointing results in the second quarter of 2015, with annual sales volumes at their lowest level compared to the previous three years.
Today the share price is quoted at $79.49 compared to $93.89 when it was launched on September 19, 2014, and its peak at $119.95 in November 2014. We can therefore ask ourselves whether it is profitable to invest in this action. It depends on your investment horizon, it is clearly not a stock to invest in if you expect returns in the short term.
If we pay more attention to the group’s fundamentals, we can clearly say that E-commerce is an expanding activity, especially in China. Retail sales on the net increased by 9% in China in March 2015. Jack Ma, the group’s founder, predicts an increase of more than 50% over the next 10 years, so this is a promising sector. More and more items are being sold online, and e-commerce is likely to reach $1.1 trillion in China by 2020. Especially, that the Internet penetration rate in China was only 48.8% in June 2015, there are still many rural locations to exploit.
Moreover, Alibaba is one of the leaders in E-commerce in China, just tonight in B2B or B2C with Tmall and Taobao. In 2014, Alibaba accounted for 81.5% of e-commerce sales in China. In addition, the group is constantly innovating and investing in different sectors such as Chinese cinema: in 2014. BABA acquired the Chinavision media group but also in Chinese production (Lions Gate Entertaiment Corp., Enlight).
The group plans to repurchase part of its shares for $4 billion, which clearly indicates that the share is listed “at a discount”. The main fears we may have about BABA concern first of all the fierce competition in China. Alibaba has fairly high margins but the increase in competition may force the group to revise them downwards for the coming years. One of the group’s main competitors is Tencent Holdings (TCEHY), which owns mobile instant messaging applications.
Secondly, we think of the slowdown in the Chinese economy, although the Chinese government has set a target of 6.5% annual growth, it is unlikely that the country’s economy will succeed in reaching this level. Especially since there is a big doubt about the reliability of the figures published by the Chinese government. Finally, we also think of the problems related to the country’s politics and the risks associated with them.
To conclude, investing in the Alibaba group’s share allows us to have exposure to the growing Chinese e-commerce sector even if we have a mistrust of the Chinese political system which is under the control of the Communist Party. Investment in this stock should be a long-term investment rather than a short-term one given current market conditions in China.