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Alibaba says open sesame to western markets
Chinese e-commerce giant Alibaba has increased the price range of its eagerly anticipated IPO to $66-$68 per share, adding further value to the offering, which is already expected to be the largest technology IPO in history (surpassing the $16bn raised by Facebook in 2012). The value could even eclipse the largest ever US IPO – that of Agricultural Bank of China in 2010 – if underwriters exercise options to purchase additional shares.
The jump in price means that the IPO could now net over $25bn, valuing the company at around $168bn, significantly higher than Amazon which had a market capitalization of just over $150bn on September 16. Investors clearly see the potential in Alibaba – which already handles more transactions than Amazon and eBay combined – as the company had already received enough orders to cover the entire share allocation a full week before the flotation.
Alibaba is involved in over 70% of online retail sales in China, generating $7.28bn in revenue for the company in FY March 2014 (84.2% of total revenue). The domestic market is poised for rapid growth driven by improved internet penetration in rural areas, coupled with burgeoning disposable incomes amongst the expanding middle class. The popularity of smartphones is also forecast to drive the Chinese online retail sector to a value of $232.3bn by 2017, a CAGR of 30.0% since 2012.
China online retail sector value forecast: $ billion, 2012–17
While this indicates that Alibaba can expect to generate significant revenue growth from the expansion of the Chinese market, the company will look to target markets further overseas including the gigantic US and European online retail sectors – worth an estimated $200bn and $230bn respectively in 2012. Founder and Chairman Jack Ma confirmed this strategy stating: “After being listed in the U.S., we will develop our business in Europe and in the U.S., we will not give up the Asia market because, as I would say, we are not a company from China, we are an Internet company that happened to be in China.”
Amazon and eBay represent the greatest direct challenge to Alibaba in Western markets, and the Chinese company will have to win market share from these two incumbents in order to make inroads in the more mature US and Europe markets. Whether Alibaba can compete with these household names in their domestic markets remain to be seen, but its highly profitable Asian businesses – combined with the cash injection from the imminent IPO – will provide the company with the firepower to go toe-to-toe with the US giants.
Alibaba: China’s answer to eBay and Amazon (MarketLine case study)