While there’s no denying the upcoming Alibaba IPO (expected to list as BABA) has reached a level of hype not seen since the dot-com era of the late 1990s, judging from how well its smaller and less-potent peers performed last quarter, the buzz is merited.
Those who were planning to own a stake in BABA stock either by participating in the Alibaba IPO or through an open-market purchase after the offering might well be pleased with the eventual result.
This Bodes Well for BABA Stock
The Alibaba IPO, slated for sometime next month, probably couldn’t have come at a better time. Its peers and competitors saw big growth in the second quarter of this year, suggesting the Chinese Internet (and mobile) market is just now hitting its full stride — the proverbial sweet spot for investors, slightly after the growth trend has been fully established but before that market is fully matured.
Take JD.com (JD) as an example. Often referred to as the Amazon (AMZN) of China, JD.com saw a 64% year-over-year improvement in revenue in its second quarter of 2014. The number of customers the company served in Q2 nearly doubled. Yet, JD.com only has a customer headcount of 38 million as of the end of the last quarter, vs. a Chinese population of 1.35 billion.
Dangdang (DANG) also posted solid Q2 numbers. Revenue was up 31% YOY, and the company swung to a net profit last quarter too. Internet security name and recent Kingsoft-spinoff Cheetah Mobile (CMCM) also saw big growth in the second quarter. Its revenue ramped up to the tune of 139% last quarter, reaching $61.3 million, and as of the end of the quarter, Cheetah Mobile reported it has 284 million active users of its products. Last but not least, LightInTheBox (LITB) unveiled its Q2 results on Wednesday of this week, and they were great — the top line grew 24%, and mobile orders grew 28%.
Were it just one or two alternatives to BABA stock that did well last quarter, it might be dismissible. Similarly, were the growth rates merely modest, it might not be a reason to be stoked about the Alibaba IPO.
But to see most of the major Chinese Internet and mobile names do well is a sign that the world’s largest single consumer market is truly coming of age … right as Alibaba is going public.
The Bigger Reason the Alibaba IPO Is “Worth It”
As impressive as the breadth and depth of the second quarter results were for Chinese Internet stocks, they’re not the core of the story that’s developing in favor of the Alibaba IPO. The undertow poised to provide a boost for BABA stock once it begins trading on an exchange goes much deeper than that.
While online shopping and even mobile Internet might be seen as commonplace in the U.S., what’s largely overlooked by American investors is that the Internet (and the mobile Internet in particular) still is relatively new in China. Only a little more than half of China’s adults are Internet users; for comparison, only 13% of U.S. adults don’t use the Internet. Point being, there’s still a lot of growth opportunity for web companies in China, assuming the nation follows the same basic growth track observed in North America.
And there’s a good possibility the pace of growth for China’s e-commerce market could be much stronger in the next few years than it was over the past few years for the U.S.
Business consultant McKinsey & Co. recently posted an outlook suggesting China’s e-commerce market could be worth somewhere between $420 billion and $650 billion by 2020. Even the low end of that forecast is more attractive than Forrester Research’s estimate that America’s e-commerce market will be worth $370 billion by 2017. While the end-dates for the two forecasts aren’t aligned, with the typical annual growth rate of U.S. e-commerce rolling in at the low-teens, it’s only a matter of time before China’s Internet shoppers are collectively spending more than North America’s online shoppers are.
It all plays right into the hands of Alibaba, and fans the flames of the Alibaba IPO.
Bottom Line for Alibaba
As of the latest estimates, the pros are saying the Alibaba IPO will value the company somewhere between $170 billion and $200 billion, although only an estimated $20 billion worth of stock will actually be issued. It’s a figure that dwarfs the $8.5 billion in revenue the company generated over the course of the prior four reported quarters, even if revenue was up 52% for the period. Net income totaled $3.71 billion for the four quarters in question, which is still a pittance relative to the company’s valuation.
While BABA stock is apt to be all over the map (as most newly minted stocks are after they begin trading publicly), the Alibaba IPO looks like it’s going to get started on a very bullish foot.
And there’s plenty of supporting bullish evidence in tow.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.