Tag Archives: Facebook

Alibaba and the $21 billion IPO

On September 18th, Alibaba is expected to complete its IPO process and officially become a listed company on the New York Stock Exchange. If the company’s stock price remains in its expected range by the time it is listed, the IPO is expected to raise approximately $21 billion; the largest in US history following Visa’s $19.6 billion IPO in 2008. Before I proceed to discuss the IPO, there may be those of you who have never heard of Alibaba before and think that I’m talking about a Middle Eastern restaurant. No, Alibaba isn’t raising $21 billion to open up a new shwarma stand so let me start off by explaining what Alibaba is.

Alibaba is a Chinese e-commerce firm that was founded in 1999 by Jack Ma, who was previously an English teacher. Similar to Amazon, Alibaba operates a business-to-consumer retail website named Tmall where established companies sell directly to customers. Additionally, Alibaba also runs a website called Taobao.com, which is a consumer-to-consumer e-commerce site where individuals and small businesses sell goods to one another. Finally, Alibaba offers an electronic payment system called Alipay, just like Ebay’s Paypal. Thus, Alibaba is somewhat of a combination of Amazon and Ebay.

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The biggest difference between Alibaba and Amazon is that whereas Amazon facilitates the sale of merchandise between companies and consumers by handling the shipping, Alibaba merely brings the two parties together in an online marketplace. So it doesn’t ship anything. Amazon’s main source of revenue is the commission it charges to companies on every transaction completed through its website. However, Alibaba does not charge any commissions on Taobao. Instead, it charges sellers to advertise on the website in order to stand out among the millions of other sellers on the website and increase their chances of selling their product.

Since its founding, Alibaba has been growing at a rapid pace and has gained control of 80% of the Chinese e-commerce sector. Currently, the company is extremely profitable and nearly unchallenged in its hegemony in China. In the 3 months ended June, the company’s net income increased to $1.1 billion, 42% more than the net incomes of Amazon and Ebay combined. To look at a statistic further up the income statement, Alibaba’s EBITDA margin in the latest quarter was 54% compared to Ebay’s 26.7% and Amazon’s meager 5.7% Currently, the company is owned by Jack Ma, Joe Tsai, who is the vice president of Alibaba, and various other investors including Yahoo who made a very profitable investment in the company by purchasing a 40% stake back in 2005 for only $1 billion.

Here is a short video by the New York Times that gives some more information on the company.

Besides efficient management and a determined vision, Alibaba’s success can be traced to two important factors present in the Chinese economy. First off is the rise of the Chinese middle class. While Chinese income per capita may still be lower than other developed economies due to its large rural population, it can’t be denied that the Chinese are getting richer. As the graph below shows, disposable income has been growing at a steady pace in line with the nation’s economic growth. In January of this year, disposable income rose 9.7% on an annual basis and reached 26,955 yuan. Thats about $4400.

china-disposable-personal-income (1)Yes you’ve probably heard stories and read on this blog that the growth in Chinese economy has been slowing down when compared to its past pace. However, incomes in China continue to rise and the middle class continues to mature. That means that the Chinese are willing to spend more, especially on higher quality retail goods that can be found on Alibaba. The rise of the middle class in China also means that internet usage is increasing rapidly, something that is vital to Alibaba’s business. As more of China’s 1.3 billion population gain access to the internet, the more that Alibaba’s revenues are likely to increase. Here’s an infograph provided by the China Information Network Center that depicts the increase in internet usage across China. As you can see, although internet usage is frequent in China’s large coastal cities, it is rapidly spreading to the Chinese countryside. With a consumer base that is already unmatched in size, Alibaba can expect to be even more profitable as more people in China gain access to the internet.

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The other reason why Alibaba and e-commerce has been so successful  in China is because of the lack in the physical retail market. Despite being greatly populous, China’s less developed cities do not have the large shopping malls and well known brands that larger cities such as Beijing has.  This is where Alibaba steps in. The company creates a bridge between the hundreds of millions of Chinese who want to spend their money but want to purchase something other than cheap replaceable products.

As the video stated, Alibaba is set to be valued at approximately $167 billion if it is listed at the expected share price between $60-65. Here is a graph provided by Bloomberg that compares the expected IPO valuation of Alibaba to other tech companies.

Ali baba infographAlthough $162.7 billion is a lot of money, analyst actually believe that Alibaba is set undervalued and set to enter the market at a discount. Market capitalization (a means of measuring the market value of a company) is calculated as share price multiplied by the number of shares outstanding. Thus, it can change as soon as the company becomes public and starts to trade. However, experts had expected Alibaba to enter with a market value closer to $180 billion. The reason why Alibaba wishes to enter the market at a relatively undervalued price is because Jack Ma wants to avoid the Facebook pitfall. Facebook was valued at $200 billion at the time of its IPO. This was an overvalued price for the company as its price plummeted after the IPO and didn’t reach its IPO price until a year later.

2123372283So should you buy into Alibaba as soon as it hits the stock markets? Is it worth committing your retirement money into an e-commerce company run by the Chinese Steve Jobs? As successful as Alibaba is and is set to be, I maintain the same opinion about IPOs as I did at the time of Twitter’s IPO. While you can check out the video below that explains why Alibaba would make a great investment, it is wise to stay weary of IPOs for the first few months. That is because generally, many institutional investors and preferred shareholders make deals with companies to hold their stock for a certain period of time following the IPO. After that period passes by, many of them dump their shares, lowering the price of the stock. So, as you listen to the following video about why Alibaba is a great buy, I recommend that you give the stock time to find itself in the market. If the fundamentals of the company are strong, you can still make a buck off of it if for the next several years even if you enter a couple months late.

“I’m not a tech guy. I’m looking at the technology with the eyes of my customers, normal people’s eyes.”
-Jack Ma

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The Bank of Facebook

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Ever feel as if Facebook is taking over our lives? We use the social media website to publicize photos from memorable moments of our lives, rant about our deepest emotions and affirm our social bonds with likes and hashtags. Well it looks as if Mark Zuckerberg has decided to plunge us further in to the Matrix by entering into the financial services industry. Last week, Facebook applied to the banking regulatory agencies in Ireland, where its non-US business is based, to permit electronic transfer of funds for its members in Europe, Africa and the Middle East. If Facebook’s application is approved, users in those regions will now be able to send each other money just like the way my relatives keep sending me Candy Crush requests.

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A few years ago, Facebook attempted a similar move by creating Facebook Credits which would allow users to spend money on virtual items such as that one cute cow you were dying to buy on Farmville. However, the system was a flop and was shut down in 2012. Facebook’s new endeavor into the banking sector is different. This time around, Zuckerberg appears to be taking on money transfer companies such as Western Union and PayPal. Remittances, or the transfer of funds from expat workers to their home countries, is a large part of the economies of many developing nations. For example, China, India and the Philippines each received over $20 billion in remittances over the last year. Because of the low standard of living in these nations, many of its citizens are forced to work abroad to be able to make a living. I spent a majority of my life in Saudi Arabia and I can tell you from firsthand experience that almost a quarter of the country’s population is expat workers. Go out on to the streets and at times you may have a hard time finding a Saudi citizen. Because expat workers in these nations may not have access to traditional banking, they rely on money transfer companies such as Western Union and PayPal. With Facebook’s potential entry into this market, it could soon replace traditional money transfer firms.

The question then becomes, how much further can Facebook or other tech companies such as Google go in the banking industry? In the past several years, large traditional banks have lost consumer confidence due to outdated mobile interfaces and countless lawsuits over its past actions. People feel much more comfortable using Facebook and Twitter than they do using their online banking websites. With over a billion users, Facebook could build on its money transfer mechanism to provide even more banking services. Here is an energetic panel on CNBC discussing this issue.

As the panel mentions, Facebook has still a long way to go before we can consider it actually becoming a bank and taking on Bank of America or JP Morgan. You’re not going to be able to receive complex banking services, such as a car loan, from Facebook anytime soon. However, the banking industry is definitely evolving and with the familiarity and dependence consumers have in using social media websites, Facebook could be a threat to traditional banks in the future if they choose to go down that path. If Facebook pushes deeper into the banking sector by for example giving loans, I find it much more probable that it will partner with a traditional bank rather than becoming a bank itself. As the contributors on the CNBC panel described, being a banking entity would bring Facebook into a new realm of regulations and restrictions; a headache that I assume Zuckerberg would want to avoid.

There is one issue that makes me doubt if Facebook will be able to pull of being a financial services company, and that is privacy. The company is notorious for having shady privacy laws that its users still do not fully understand. One of the ways Facebook makes money is by selling the information of its users to advertisers and marketing companies. If you also add in the fact that Facebook is flooded with fake accounts, then its users might not trust the site to transfer funds or receive banking services from it. Despite the tarnished reputation of traditional banks, I’m probably not the only person to think that transferring funds over a bank feels safer than doing it over Facebook.

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Fake accounts are a serious issue for Facebook.

Over the past year, Facebook has acquired Instagram, Whatsapp, and Oculus VR, a virtual reality gaming company. In my opinion, these acquisitions show that  Facebook is trying to become much more than just a social media website and is actually attempting to have a larger presence in our lives. Thus, banks should ignore Facebook’s new move at their own peril.

“Payment schemes are the equivalent to credit cards in emerging markets and here is where Facebook can make progress … especially in those places where banking infrastructure is not as mature as it is in Europe or the US.”
-Brian Blau, Director at Gartner Inc.

Twitter To Go Public – #dontfallforthehype

The company that is single-handedly destroying modern language with hashtags has decided to go public. On Thursday, Twitter announced that it had filed for a secret initial public offering (IPO).  What’s so secret about it? I’ll explain that later. But if everything proceeds as planned, Twitter will follow the footsteps of other social networking websites that have gone public such as Linkedin and Facebook.

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Before discussing Twitter, it is important to comprehend why companies decide to go public. Most companies in developed markets are privately owned. Even some big names such as Domino’s Pizza and IKEA are private firms. Being private allows the management and owners of the company to implement policies with more ease since they aren’t continuously under the scrutiny of analysts and shareholders.

However, a company may go public if they need to raise cash, or in finance-speak, capital, from external sources for the company to grow further. Of course being listed on a stock exchange also gives firms a considerable amount of prestige. Firms usually hire the services of investment banks such as Goldman Sachs or Morgan Stanley to publicize and organize the IPO so that investors are drawn to buy the company’s stock once it goes public.

Once a company does go public, investors will be watching over the company like a hawk. Earnings reports, management statements, new product launches will be observed with much more attention. Because of increased profit expectations, you can expect the company to either launch new products or revamp its business.

With that background information on IPOs, we can now focus on Twitter. Twitter is expected to be valued at around $10 billion and has around 200 million users. Even though Twitter has been successful so far, it’s a smaller company when compared to other Web platform giants such as Facebook, Yahoo, Google and Amazon. By going public and raising capital, Twitter will be seeking to cement itself as one of the big boys of the web industry. In order to develop itself, Twitter will attempt to generate further ad revenue, expand its features, and integrate itself even further with other products. In fact, in an effort to enhance its mobile advertising feature, Twitter recently acquired MoPub, a startup that focuses on mobile ad exchanges

So far it looks like its all going to be sunshine and rainbows. Twitter will go public, its share prices will rocket because everyone has a Twitter account, everyone will get rich, and world peace will be achieved. Right? Right? Wrong! Investors should be very careful when approaching IPOs and in my opinion, its best to avoid them altogether. There are several reasons why it is wise to avoid IPOs.

1)      Firstly, being a public company is a hassle for most firms. They must adhere to various regulations and constantly please investors. Thus most firms choose to stay public. But if they do decide to raise capital, they could do it via a private placement. As opposed to a public offering, a public placement is a way for companies to raise capital by only selling ownership to a few individuals. This process is much easier than having to go through a public offering. If a company has decided to engage in a public offering, it could be that the company failed to raise capital through a placement because they were unable to find large investors. Thus it is important to ask yourself, what is the state of the company I’m planning to invest in?

2)      The IPO will be the first time that a company will have to adhere to certain regulations and reveal its financial statements in detail. Thus your previous conceptions about the firm may be mistaken. The only solid information you will have access to will be the information provided by investment banks who are desperately trying to attract investors.  This is also where the term ‘secret IPO’ comes into play. According to the JOBS Act which was passed last year, a company with revenue below a certain point can release less information prior to an IPO than a firm with higher revenue figures. This makes Twitter’s IPO filing even more suspicious. What have these guys got to hide? Be wary. Wait a few months for the firm to be in the public domain and find its true value.

3)      Most institutions investors who purchase shares during the IPO tend to hold them for a few days and then dump them to make a quick profit. This is why after most IPOs, the price of the stock initially falls. To see a good example, take a look at Facebook. Its price plummeted after the IPO and it took 14 months for it to reach its original price.

Thus, after an IPO, its wise to hold back for a minimum of 4-5 months for the price to settle and the company’s shares to find its true value as opposed to the initial artificial IPO price. You can probably tell that I despise hashtags but if I ever had to use one, it would be as follows: #dontfallforthehype

For more insight, feel free to watch this clip from Bloomberg.

“I’m kind of like the person you would want to ask least about how to make a smooth IPO.”
-Mark Zuckerberg, in response to whether he had any advice for Twitter