Alibaba IPO Amasses $21.8B on NYSE Day 1 Trade; Up 38%

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The Chinese e-Commerce goliath — Alibaba Group Holding Ltd. — finally debuted on the New York Stock Exchange (NYSE) under the symbol ‘BABA' on Friday. Following its debut, the share price surged 38% in after-hours trading.

Alibaba's stock began trading at $92.70, well above its IPO price of $68, backed by strong demand, and hit a high of $99.70 eventually closing at $93.89. Alibaba's IPO raised $21.8 billion, surpassing $17.8 billion — the amount raised by credit card marketer Visa's IPO in 2008 — and Facebook's $16 billion in 2012. This is the third largest global IPO, following the Chinese bank, Agricultural Bank of China, in 2010, which raised $22.1 billion and Industrial and Commercial Bank of China, which garnered $22 billion in 2006. However, if Alibaba's underwriters choose to exercise the option to sell an additional 40 million shares to cash in on the strong demand, the amount will go up to $25 billion, making it the largest IPO ever.

Alibaba had raised its IPO's price band to $66–$68 a share four days prior to its listing, reflecting unprecedented demand. The e-Commerce giant had chosen Barclays PLC as the lead underwriter for its IPO and signed agreements with several large U.S. banks, such as Credit Suisse Group, JP Morgan Chase, Citigroup, Morgan Stanley, Goldman Sachs, Deutsche Bank AG DB, as the underwriters.

Most of the shares were allocated to large institutional shareholders such as Blackrock, which put in orders for allocating at least $1 billion shares, according to sources. The founder and executive chairman Jack Ma, garnered $867 million by selling about 12.8 million shares — just a fraction of the total 206.1 million — ahead of the IPO.

Alibaba — A Brief History

Headquartered in China, Alibaba Group Holding Limited BABA is the largest e-Commerce company in the world, processing more than $248 billion through online transactions in 2013. It strives to provide the best online marketplace where consumers or businesses can buy and sell products without any geographical barriers. In fact, this has led many to term the company as ‘a mixture of eBay EBAY and Amazon AMZN'.

Alibaba's two largest and best known platforms are T-Mall and Taobao. T-Mall allows different brands and retailers to set up stores and sell their products directly to Chinese consumers. Taobao is Alibaba's consumer-to-consumer platform connecting Chinese sellers and buyers in the way similar to eBay.

To its advantage, Alibaba primarily operates in China — the most populous country in the world — with a market strength of 1.35 billion. China has 618 million Internet users, 500 million mobile Internet users and 302 million Internet shoppers. However, only 7.9% of the country's consumption takes place through online shopping offering enormous opportunities to the company.

Alibaba - Valuation and Financials

At a price of $68, Alibaba's total market valuation is $167.6 billion, larger than a host of U.S. behemoths including Walt Disney and Boeing Co. Also, the company's valuation is much higher than the U.S. e-Commerce giant Amazon's valuation of $150 billion and eBay's $65.4 billion.

In its Sep 2 amendment to the SEC filing, Alibaba reported revenues of $2.54 billion, up 46% year over year for the three months ended Jun 30, 2014. Its GAAP operating margin was 43.4% down 690 basis points from the year-ago quarter, primarily due to a significant increase in operating expenses. However, Alibaba's operating income was 42% more than the combined profit of Amazon and eBay for the same period. After including one-time gains, net income attributable to Alibaba's ordinary shareholders nearly tripled to $1.99 billion (84 cents per share) — more than double the amount earned by its competitors.

These results clearly show that Alibaba is far more profitable than Amazon and eBay combined.

Bottom Line

Being a leader in the Chinese e-Commerce market and the first Chinese company to make a successful entry into the U.S., Alibaba's shares are a great long-term investment opportunity. However, investors have to be patient in the short run as Alibaba might need some time to gather steam and realize the nearly limitless potential offered by its business platform.

It will be interesting to see how Alibaba channelizes the proceeds from its IPO. It is expected that a portion of the amount generated will be used to fund the expansion into the United States and Europe.

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