Don't Believe All the Media Hype About the Alibaba IPO
With much anticipation, e-commerce giant Alibaba had its $25 billion initial public offering this morning, but just how important is the Chinese tech stock when compared to American web marketing Goliaths like as eBay, Amazon and Google?
Alibaba is certainly nothing to sneeze at. It’s a daunting megaplex of business-to-business portals, online escrow services, search engines and e-commerce retailers and the IPO is the largest in U.S. history. However, there seems to be a lot of media hyperbole about the company during its Wall Street debut.
From an investment perspective, while Alibaba is on the New York Stock Exchange, it’s not a U.S. company and will not be included on the Standard & Poors 500 index. This means that stock funds that track American indices will not be permitted to buy the stock and Alibaba’s shares will have very little impact on the performance of the broader market.
It will also not be included in the NASDAQ index, which is the preferred exchange of tech stocks. Because of this, analysts say it won’t be benchmarked against comparable stocks, possibly making Alibaba more volatile than a conventional tech stock.
If you were to buy shares in Alibaba, you really aren’t buying part of the company, and wouldn’t have any voting rights as a shareholder. Instead you would buy shares in something akin to a holding company.
China strictly prohibits foreign ownership of companies that it believes to be important strategic assets, such as Alibaba. The company listed on the NYSE is actually a Cayman Islands-registered corporation known as a “variable interest entity” that’s under contract by Alibaba to receive profits from the company, while not actually owning any of it.
Also, while Alibaba is a giant in Asia — China alone had more than 300 million online shoppers last year — the corporation’s e-commerce sites are relatively old-school and simple, resembling Western market sites built in the 1990s. So, you might say comparing Alibaba to eBay or Amazon is akin to comparing an Atari 2600 to a Sony PlayStation 4. Large as it is, Alibaba is a company that’s still finding its footing; it’s not likely to supplant Amazon, eBay, Google, or Facebook as the world’s biggest tech innovators anytime soon.
Alibaba also has a problem with counterfeit goods sold on its sites, which include Alibaba, Taobao, Tmall and AliExpress. This has hurt the company’s reputation as a purveyor of legitimate vendors. And while the company has been working to identify and remove vendors who market bogus goods, counterfeiters are hard to displace and it may take some time to win consumers’ confidence in the quality of the products sold through the site.