5 pros and cons of investing in Alibaba
Sure, Alibaba is generating a lot of buzz ahead of its historic public debut on Friday.
Wall Street bankers boosted the deal’s price range to $66 to $68 a share, up from the previous range of $60 to $66, because of surging demand.
But investors hoping to make a killing when Alibaba starts trading on the New York Stock Exchange should weigh the pros and cons first.
Here are five reasons why small investors might want to jump in on the action — and five reasons they might choose to stay far away:
PROS
1. Bigger than Amazon
Alibaba is the world’s fastest growing e-commerce market. Its three retail sites helped vendors transact an eye-popping $296 billion in sales for the 12 months ended June — more than eBay and Amazon combined.
2. Soaring growth
Alibaba’s revenues, largely from advertisements, are growing by leaps and bounds. The company generated $8.4 billion in fiscal 2014, up saw 52.1 percent from the year before.
3. Better business model
Unlike Amazon, Alibaba doesn’t sell goods directly. It acts as the middleman linking buyers to sellers. This is great for keeping costs down and profits up, especially as Amazon struggles with net losses despite double-digit sales growth.
4. Global expansion
China isn’t big enough for Alibaba founder Jack Ma, who has a global expansion on his mind. Ma recently said he plans to expand aggressively in the US and Europe after the IPO.
5. Bigger than China
Alibaba controls an estimated 80 percent of China’s online shopping, but that’s nothing compared to its potential. China boasts the world’s largest Internet population with 618 million users in 2013 — but that’s less than half of its 1.4 billion population.
CONS
1. No control
US shareholders have little sway over Chinese companies, even those that trade here. Alibaba will be no exception.
2. Owners in name only
Investors won’t own shares directly in Alibaba due to Chinese laws forbidding foreigners from owning Chinese Internet companies. Instead, they will invest in a Cayman Islands holding company, known as Alibaba Group Holding, which has contractual rights to profits from the Chinese businesses.
3. Inside job
Alibaba’s Cayman Islands holding company will be controlled by a group of insiders, including founder Jack Ma, who have 60 percent of the voting power.
4. Government interference
Accounting oversight may not be easy. The US entity established by Congress to oversee public company audits, known as the Public Company Accounting Oversight Board, cannot conduct inspections without approval of the Chinese government.
5. Bad reputation
Ma’s expansion plans could be hindered by the company’s poor US reputation. Alibaba’s US portals, Alibaba.com and AliExpress, have received an “F” rating from the Better Business Bureau due to its failure to respond to a whopping 79 complaints lodged against it.