Until recently people in the Western world knew Ali Baba as an Arab carpenter who upset 40 thieves and was lucky to survive. But on 19 September 2014 Alibaba also officially became one of the most valuable companies on the planet, its New York Stock Exchange IPO valuing the company at c.$170bn and opening the door of the Chinese corporate cave.
If you didn't before the IPO, you probably now have a reasonable idea what Alibaba does, but to summarise - if money is spent online in China, it is overwhelming likely to be on Alibaba - for now at least. Imagine the services of Amazon, ebay, Spotify, Whatsapp, Paypal, and many more, combined into one group and accessed regularly by nearly 300 million registered users. The valuation must be driven from the market potential of having access to so many users then, surely? As mind bending a number as 300million is, it's a fraction of the Facebook user base of 1.35bn, and yet the valuation of Alibaba surpassed the valuation of Facebook by 54 per cent at IPO. Facebook should have had BABA beat.
Tech stocks are a strange phenomenon; it's not all about users and profits it seems. Take two of the best known tech companies out there: Apple and Amazon. Apple has a balance sheet of $112bn, of which $25bn is in cash and liquid assets, and a net profit margin of over 20 per cent, yet it attracts only a miserly value of 18 times its profits. Amazon, on the other hand, reported a loss of $437m for the three months to September 2014 and the shares have historically been traded at a price in excess of 450 times the company's profits, yet it has a significantly smaller balance sheet and half the user base. How can that be right?
The nationality of the Company and the scale of the transaction have grabbed the headlines, but what of business fundamentals that we all know the Investment Banks and Fund Managers considered deeply in the run up to the flotation? Fundamentals such as: how does the technology itself compare with the incumbent market leaders in the West? Does the technology travel or are we Westerners incompatible with the Chinese interface? Will Western banks be reticent when it comes to transacting payments on a Chinese platform? Indeed, will Alibaba even pass their ethical policy checks, given China's attitude towards human rights! Ironically, the opening up of China's economy to the rest of the world has provided both opportunities and threats to Alibaba. The substantial capital raised in the West will no doubt have been earmarked internally for spending on global domination; but in reality, Alibaba may also need to defend its position domestically as the big multinationals try to gain access to the Chinese market. So how much of the cash raised in the West will actually benefit the West?
Whatever the corporate Alibaba's "open sesame" is, it has opened the door to the Chinese economy, led to the biggest IPO in history, and brought another colourful billionaire, in Jack Ma, to the attention of the world. The question remains though, have investors squirreled their cash away in a safe investment, or will they be robbed in the night?