Operates like Ebay but makes money like Google
Alibaba has been described as a mix of Amazon, Ebay and even Google. It has two main sites Taobao a consumer to consumer site with 8 million sellers and Tmall which sells goods direct from 100,000 brands. The Tmall business model is similar to Amazon with sales commissions ranging between 0.5% to 5% of GMV. Taobao operates like eBay but it monetises similar to Google with sellers using advertising to stand out from competitors. This is great from an investor point of view as unlike Amazon Alibaba does not have to hold or bear inventory reducing the capital required for the business. China's highly competitive online market is also great for Alibaba as more competition means more advertising as sellers try to differentiate themselves. Alibaba is a seller of clicks not products, because of this Alibaba's business has growth attributes of all the best technology companies but with better margins (see below).
Alibaba is dominant with 83% ecommerce market share of China's $296 billion market so going forward Alibaba will be reliant on overall market growth rather than market share. Luckily only half of China's 1.35 billion population is online and again only half that number are internet shoppers suggesting that there is future growth. This optimism is backed up by the lack of offline retail in China which is not yet built out compared to other developed countries (see below). It is not such great news for the US which has a retail footprint much larger than peers.
Mobile is a big focus for US companies in China its even more important as users in China leapfrog desktop computers for smartphones. For example China's biggest search engine Baidu expects mobile search to surpass PC as the biggest source of search traffic later this year. In the three months ended December 31, 2013, mobile accounted for 19.7% of gross merchandise sales, up from 7.4% in the prior year, revenue has not been disclosed.
The smartphone has been good news for most technology companies as it now means users have access to the internet on the go. The companies that have struggled with this shift have been companies that rely on advertising. Smaller screens have made it harder to advertise an issue companies like Facebook know all about. Alibaba is facing similar issues in the F1 they disclose that they will not display as many ads on their mobile apps compared to the PC, a transition investors should pay attention to.
Show me the money (Alipay)
One great trade
The major shareholders are Yahoo and Softbank. In 2005 Yahoo purchased 40% of the company for $1 billion in cash and folded Yahoo China into Alibaba. Yahoo sold 20% of Alibaba shares back to the company in 2012 that valued Alibaba at $35 billion or US$13.5 per share for $7 billion and is obliged to sell 40% of its remaining stake (overall 24% holding) in the IPO. The increase in Alibaba's valuation has driven the performance of Yahoo and Softbank's shares in the past year.
But how will Alibaba do?