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The Key Question on Alibaba

Thu, 8 May 2014

Morningstar's R.J. Hottovy says a key uncertainty ahead of Alibaba's IPO is whether the firm can duplicate its success outside of China.


Video Transcript

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Chinese e-commerce giant, Alibaba, has filed for an IPO in the United States. I'm here with R.J. Hottovy, our consumer equity strategist, for his first impressions.

R.J., thanks for joining me.

R.J. Hottovy: Thanks, Jeremy.

Glaser: Let's start with what Alibaba is exactly. How would you compare it to maybe some of the e-commerce sites here in the United States?

Hottovy: It's a fascinating company in the fact that it really is a combination of Amazon, eBay, PayPal, and a handful of other consumer and technology companies. At its core, it really is an online marketplace for Chinese consumers to buy products from third-party vendors. They don't do a lot of the inventory themselves. It really is much more of a marketplace which differs from Amazon, which takes ownership and is the retailer of record for about 60% of its products.

But at the same time they do have a payment-service business; they've been getting into cloud computing. It's a very diversified player, and I think much more so than a lot of the market realizes as what we found out looking through the filing.

Glaser: What's driving the interest in this company? There's some talk that it could be the largest Internet IPO of all time. What makes it different?

Hottovy: I think it's twofold. One, it's a play on the continued shift toward online retail sales. I think that the company has done a great job in China, building a strong network effect, and a lot of it is just because you hadn't seen the traditional bricks and mortar retail infrastructure built-out like you had in the U.S., which gave them a huge opportunity to strike and strike fast and really capture quite a bit of market share.

I think that there's interest in the fact that they've built a very efficient model that potentially could be moved outside of China. The other thing is it's also a play on the rise of the lower- to middle-income consumer in China. You've seen tremendous amount of wage-rate growth among that lower- to middle-income consumer. And so the expectation is that we'll continue to see more disposable income devoted to online purchases within that market.

Glaser: But that does raise some questions. Will this model actually work outside of China? Do they have plans for international expansion?

Hottovy: Yes, that's the key question, and that's something that's still a little bit unclear based on the filing: What are their aspirations outside of China? They've clearly been making acquisitions in other markets. They've made a few in the United States; they've made a few in other Asian markets. So that's the real key question, is clearly they've got a strong presence and some real strong competitive advantages in the China market, and whether or not those are going to apply to other regions that's still I think the question that's left to be seen at this point.

Glaser: R.J., thanks for your first take, and we'll certainly look forward to your analysis as we get more filings and get closer to that IPO date.

Hottovy: Absolutely. Thanks.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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