Alibaba: What You Should Know About the Most-Hyped IPO of the Year

What's This?

In this Sept. 14, 2012 file photo, Chinese Internet entrepreneur, Jack Ma, founder and chairman of Alibaba Group, attends an event in Hong Kong to celebrate the 70th anniversary of Emperor Entertainment Group Ltd., one of Hong Kong's biggest market leaders of the entertainment industry.

Image: Kin Cheung/Associated Press

By Seth Fiegerman2014-05-06 20:57:19 UTC

Alibaba filed paperwork on Tuesday for a $1 billion public offering. It is expected to increase significantly and could become the largest IPO of all time.

If your first thought reading that is "What the heck is Alibaba?", you're probably not alone.

Alibaba is a household name in China and well-known among certain tech industry watchers and investors abroad, but it doesn't exactly have mainstream recognition among consumers in the United States. That might change after its IPO.

See also: Here Come China's Tech Giants: Weibo, Alibaba to IPO in U.S.

To help you get a head start learning about this fast-growing tech company, we've put together a primer on what Alibaba does, how it got so big and what impact it might have on other U.S. businesses.

What exactly is Alibaba?

The Alibaba Group is the largest ecommerce company in China and, according to some reports, the largest in the world. It primarily consists of two big shopping websites: Taobao, which launched in 2003 to compete with eBay in China, and Taobao Mall (or Tmall), an online shopping marketplace.

So basically it's just China's version of Amazon?

Not quite. Unlike Amazon, Alibaba doesn't actually handle any of the logistics — like fulfillment centers — for online shopping. It just creates the platform and user experience for consumers to shop from various brands.

Even that user experience is notably different. "When you are buying something on Amazon, you are engaging with amazon," says Kelland Willis, an analyst with Forrester Research. "When you buy on Tmall, you are engaging with the brand."

Alibaba's investments also extend well beyond traditional ecommerce. It has invested in a Chinese department store operator, mobile messaging app Tango and Weibo, China's version of Twitter which recently went public. It is also reportedly in talks to get back a stake in Alipay, a payment service like PayPal.

A shopping page on Tmall, one of Alibaba's main web properties, which is popular among domestic and foreign brands for selling products in China.

Just how big is it?

Alibaba generated more than $3 billion in revenue for the fourth quarter of 2013, an increase of 66% from the same quarter a year earlier. Its gross profits for the quarter shot up by an even higher percentage to just under $2.4 billion.

The Wall Street Journal reports hearing from sources that the combined sales volume on Taobao and Tmall hit $240 billion in 2013. On Single's Day, which is essentially China's version of Cyber Monday, Taobao and Tmall topped $5.75 billion in sales. That's more than double the sales of all online retailers on Cyber Monday.

Alibaba is expected to go public with a market cap of around $165 billion, though some analysts think it may top $200 billion.

How does someone even build up a company that big?

Alibaba was founded in 1999 by Jack Ma, an eccentric English teacher-turned-entrepreneur who became interested in building Internet companies after going online for the first time in 1995 while on a trip to Seattle.

The secret to Alibaba's success, according to Forrester's Willis, is a combination of launching when the ecommerce market was still small in China and going out of its way to build trust with consumers in the country.

"What Taobao did from the beginning was they created a set of regulations that absolutely ensured consumers get the product they ordered," Willis says. One example of that is the option to pay cash upon delivery, after the shopper has had a chance to inspect the item in person. "It builds trust with the brand. As a result, consumers thought of Alibaba Group as a whole as one they could trust to interact with."

China's ecommerce market has also ballooned in recent years and is expected to be larger than that of the United States in the not-too-distant future.

Why is one of the largest companies in China doing a public offering in the U.S.?

Initially, Alibaba reportedly wanted to go public on the Hong Kong stock exchange, but decided otherwise because regulators in the country would not greenlight its proposed governance structure. But Alibaba stands to gain other benefits from listing in the U.S. as well.

"By listing in the U.S. you open up the doors to a lot more potential investors," says R.J. Hottovy, senior analyst with Morningstar. "There are some question marks about accounting and security rules outside the U.S. and European markets. The U.S. listing will add a layer of creditability."

Alibaba's headquarters in Hangzhou, China

Will the Alibaba IPO have any impact on U.S. tech companies?

The Alibaba IPO is coming at a time when investor sentiment for the tech sector has weakened thanks in part to sky high valuations. That could change if Alibaba proves to be a strong IPO.

"If it was successful and did well and was priced with a premium valuation, I think that could have a halo effect on the broader tech space," Hottovy says. "It could spur some renewed interest in the space."

At the very least, it will have a notable impact on Yahoo, which as a 24% stake in Alibaba and stands to net as much as $10 billion from the Alibaba IPO, depending on how it prices. That could give Yahoo and CEO Marissa Mayer the additional resources needed to make some big acquisitions.

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Topics: AliBaba, Business, china, stocks