Although I’m not always able to, I enjoy providing topical articles as often as I can. Even if you don’t pay much attention to the stock market or what’s going on in the world of finance, you’ll have most likely heard of Alibaba, and how it had the largest IPO (initial public offering, meaning it sells ownership in the form of stock to the general public) this past Friday. Up until last week, most Americans had never heard of it, now it’s a company larger than Amazon, Facebook, IBM and Intel. What? Before you get caught up in the hype or completely ignore it, I wanted to provide you with a little info on the company itself and to give you my two cents on it.

What is Alibaba?

Alibaba is an online Chinese retailer, founded in 1999, so it’s actually not all that new of a company. It runs a number of websites; Alibaba, Tmall, Taobao, Juhuasuan, and a number of other sites. It’s sort of a mix between eBay and Amazon, in the fact that it serves as a middleman marketplace, connecting buyers and sellers (like eBay) but it also has some of it’s own logistics and payment functions (like Amazon). It’s websites are an absolute monster. It processes sales and makes a profit that would make eBay or Amazon look like the JV squad. We all know that China has 1.3 billion people, and although not all of them have internet access, a lot of them do, and most of them use Alibaba’s sites. It’s absolutely insane.

Why are the IPOing?

By offering the general public ownership it itself (selling stock), Alibaba was able to raise $22 billion, which also happens to be the largest IPO ever. Alibaba is quite profitable and is making plenty of money on it’s own. However, it’s ambitions are much larger than China itself, and Alibaba will likely use the money to fund expansions and acquisitions, helping it grow even more.

Tell me about their IPO last Friday.

Alibaba originally planned to ‘go public’ at $60-$65 or so per share. That seemed fair to them and seemed to be a good price for all the sellers to be able to get as much as they wanted. Then they started talking to big investors, to gauge the investors interest. What they heard surprised them, and sent them back to the drawing board. Basically anybody who is anybody in the investing world wanted to get their hands on a ton of Alibaba stock. We’re talking big guys coming in saying they wanted to buy $1 billion worth of shares. It got a little outrageous, and they raise the price to $65-$68 for last Friday’s IPO. As they started selling some of the shares on Friday, it became evident that $68 wasn’t high enough, that the demand greatly exceeded the supply. I heard of one online brokerage saying that HALF of their orders Friday morning were for just one stock; Alibaba. The price kept going up until it was finally released to the general public at $92 or so per share, around 12 noon Friday. The stock jumped up to $99 and then fell to about $90, finally ending the day a little above it’s IPO price.

Should I buy it? What are the pros and cons?

That’s a tough call, one that I’m certainly not qualified or certified to tell you. The pros seem pretty obvious, Alibaba is on tract to become the first online retailer with $1 trillion in annual sales and it just keeps making money. It will likely use all this money they raised to rapidly expand into other countries. They’ve got a proven and profitable model. Seems like a good investment, right? What about the cons? Alibaba is also full of risk. It’s facing plenty of competitors in China and will continue facing competitors as it expand internationally. Also, when you’re number #1, basically everybody is gunning for you. Investing in a large growth company like this will always entail risk, there’s just no way around it. Expectations are high for Alibaba to deliver, and deliver solid results. There have been some complaints about shareholder’s rights, as the shares you can buy on the general market don’t come with voting rights so basically their management team can do as they please. Finally, foreign ownership of Chinese companies like this is technically illegal in China. To get around this, a holding company was setup in the Cayman Islands and this holding company has contractual obligations for Alibaba’s earnings. Seems a little sketch but there are plenty of other Chinese companies (Baidu for example) that do this to. Let’s just hope the Chinese government doesn’t decide to crackdown too much.

Investing in riskier, ‘speculative growth’ companies such as this should only make up a small part of your investment portfolio. If you decide to invest, don’t put too much money it it. Please also take my advice with a grain of salt, I can’t predict the future and can’t tell you whether to invest or not. Hopefully I’ve laid out enough pros and cons to help you make your own decision.

Now you can tell all your friends that you know what Alibaba is and what it’s deal is! Finally, the ticker is BABA, if you wanna look it up on the market.

*Disclosure, I bought a couple of shares Friday at the IPO and am now an Alibaba shareholder.

Thanks for reading! Here’s another you might enjoy: How does the stock market work?

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