Alibaba Files for an IPO: Why You Should Care

Alibaba Files for an IPO: Why You Should Care
Alibaba's headquarters in Hangzhou, China
Photograph by Nelson Ching/Bloomberg

The Chinese technology company Alibaba filed in the U.S. today for its initial public offering. What is Alibaba, you may be asking if you’re not Chinese or an obsessive reader of tech blogs? It’s an e-commerce company, a mix of Amazon, EBay, and PayPal. There’s Tmall, an online shopping mall; Taobao, a marketplace where small Chinese companies can sell directly to consumers; and Alipay, a digital payments company that Chinese consumers use through their mobile phones for all sorts of transactions, on Alibaba sites or off.

And why is this a big deal? Because Alibaba does huge business, and therefore is going to be worth a lot of money. Last year, Alibaba sold $248 billion in goods—everything from frozen fish fillets to Nike sneakers to used jetliners. In one day last year, it saw $5.8 billion in transactions. Alipay was used in payments worth $519 billion. Alibaba is the biggest e-commerce site in the world’s fastest-growing economy, one where many inhabitants aren’t even online yet. Because it functions largely as a marketplace, Alibaba’s operating costs are relatively low, and that, along with its very low taxes, means it enjoys profit margins of 45 percent.

Analyst estimates for the company’s post-IPO value range from $136 billion to $245 billion. If it’s anywhere but at the bottom of that range, that means the company will be more valuable than Facebook.

Big winners from the sale will include Alibaba founder Jack Ma, who owns 8.9 percent of the company, Russian entrepreneur and investor Yuri Milner, and the American private equity firm Silver Lake Partners.

Yahoo! owns 22.6 percent of Alibaba, a fact that has been one of the few things bolstering its stock price. It will sell off a little less than half of that stake in the offering, for what is estimated to be at least $10 billion, and there’s already speculation about what the company will do with it: go on a buying spree of smaller companies? Buy back shares?

One of the questions analysts asked in the days leading up to the IPO filing was how much Alibaba would look to expand beyond China. In its prospectus the company seems to keep its focus at home. The company points out that China has far less retail space per capita than the U.S. and wealthy European countries—0.6 square meters per person, compared with 2.6 square meters per person in the U.S.—while at the same time online shopping still makes up only 7.9 percent of Chinese consumption. And consumption in China in 2013 made up only 36.5 percent of gross domestic product, as compared with 66.8 percent in the U.S. China, it seems, has only begun to shop.

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