Online payments is certainly a big business in the U.S. But of course, it’s even bigger in China. That’s certainly good news for Alibaba Group Holding, which operates the Alipay payments system. It makes its rivals look downright puny. And the company is posting some really good metrics as we move closer to the eventual Alibaba IPO.
Last year, Alipay racked up 2.78 billion transactions for a total of $148.43 billion. This was done with more than 100 million users. To put this into perspective, eBay’s (EBAY) PayPal generated only $27 billion in transaction volume in 2013.
It definitely helps that Alibaba is a massive online marketplace for goods and services (the main properties include Taobao and T Mall). It’s kind of like eBay as it connects buyers with merchants. Alibaba gets a commission on the transactions, which has helped the business rake in revenues on the way to the Alibaba IPO.
Strong Growth Leading Into Alibaba IPO
And the business has been brisk. In the third quarter, Alibaba posted a 51% increase in revenues to $1.78 billion and net income came to $792 million. No doubt, Q4 should be strong as well because of the holiday season. Keep in mind that on China’s version of Black Friday, Alibaba pocked sales of $5.8 billion. With the Alibaba IPO looming in the not-too-distant future, those are strong, encouraging numbers.
The company’s growth has been especially impressive considering the strength of its competitors. Companies like Tencent Holdings and Baidu (BIDU) are directly competing with Alibaba for consumers’ cash.
But the company is not resting on its laurels ahead of the Alibaba IPO. It has been aggressive in moving into other lucrative categories. For example, it has an 18% equity position in Sina’s (SINA) Weibo property, which is similar to Twitter (TWTR).
And just this week, Alibaba has made a bid for AutoNavi (AMAP), which is a Chinese digital mapping provider. The deal will help improve the company’s mobile capabilities and could allow for lucrative revenue streams, such as restaurant reviews. AutoNavi has roughly 77 million active users or about 31% of the Chinese market. If the deal goes through, it will be a huge boost for the Alibaba IPO.
But the Alipay platform is likely to remain a key driver ahead of the Alibaba IPO. According to iResearch, China probably became the largest online retail market in 2013. But the penetration is still relatively low and is expected to go from 45.5% in 2012 to 58.2% in 2016. What’s more, mobile will be another factor. The penetration rate — as a percentage of online users — is expected to go 9.1% in 2013 to 19.9% by 2016.
But Alibaba will also need to go beyond China to maintain its growth ramp for the long term, even beyond the Alibaba IPO. To this end, the company is pushing into the U.S. market with the launch of a new e-commerce website, called 11 Main. The focus will be on premium fashion and jewelry products. It would seem likely that Alibaba would also leverage its payments infrastructure as well.
The company could be poised for some dealmaking in the U.S., too. Last year, Alibaba set up an investment group in San Francisco and has already pulled off some transactions. One was an investment in ShopRunner, which is a members-online site for fashion brands like Calvin Klein, Tommy Hilfiger and American Eagle Outfitters (AEO).
Given all this, it should be no surprise that Wall Street is giddy about an Alibaba IPO. The consensus on the valuation is $150-plus-billion. Investors have been playing this is through Yahoo (YHOO), which has a 24% stake in the company, but they’re dying to get directly into Alibaba.
Right now, the details of an Alibaba IPO are still sketchy in terms of the timing as well as what exchange it will list on.
While You’re Waiting…
But there are other, similar investments worth your attention in the meantime. Just look at the the upcoming IPO of JD.com. JD is a rival to Alibaba and the deal could easily raise over $1 billion.
JD.com is similar to Amazon (AMZN), operating 82 warehouses across China. So losses have been heavy because of the need for capital investments. But this may not matter too much, as Wall Street will likely pay attention to the strong growth rate. After all, for the first nine months of last year, revenues came to $8 billion, up about 70%.
The JD.com IPO looks like a nice opportunity while we’re all waiting, but expect the Alibaba IPO to steal headlines whenever details are announced. And given the company’s growth in many different areas, the Alibaba IPO is almost guaranteed to be the largest of the year … whichever year that is.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.