It's 'MA'gic

It is the biggest IPO to hit American shores in recent memory. Chinese e-retailer Alibaba made its US debut this September, managing to raise close to $21.8 billion on the NYSE. This figure makes Alibaba’s IPO the largest in American history, after Visa’s $19.65-billion debut in 2008 and Facebook’s $16-billion 2012 IPO. The stock, which was priced at $68 per share, valued the company at $168 billion — higher than the combined market cap of Amazon and eBay. Post the 38% gain on listing, the firm’s valuation was bumped up to $230 billion, making it more valuable than Facebook and generating $9 billion of profits on paper for the IPO investors.

At $90 per share, Alibaba is trading at 40 times its FY15 earnings and is considerably cheaper than Amazon (trading at 175 times FY15 earnings), given its superior profitability parameters. Unlike most e-commerce firms, Alibaba runs a very profitable business. In FY14, it generated a profit of $3.8 billion on revenue of $8.5 billion, compared with Amazon, which sold goods worth $74.4 billion but managed only $274 million in profits in 2013.

Though Alibaba handles 80-85% of e-commerce in China, there is room for growth. In a population of 1.35 billion, there are only 618 million internet users, of which just 50% opt for online transactions. According to Bain & Co, the online market is likely to grow by 32% each year till 2015; more people buying things online will ensure that Alibaba remains on a high growth path for the next couple of years at least. Which is probably also one of the reasons why investors don’t mind paying top dollar for the company. Despite some concerns about corporate governance and the company’s ability to conquer the mobile e-commerce platform, it looks like Alibaba will remain the stock market favourite for the foreseeable future.