Invest in What Works

Few companies can claim the degree of success that has been enjoyed by China’s Alibaba. With a very interesting business model, Alibaba is billed as the world’s leading business to business e-commerce company.  Alibaba brings together businesses of varying sizes from around the world.

Alibaba is based in Hangzhou and has satellite offices in 30 cities. The firm is listed on the Hong Kong Stock Exchange. Like other online marketplaces, Alibaba has found a great niche market on the Internet, much like eBay and Amazon. Alibaba is especially good at connecting smaller companies with buyers in other parts of the globe. These marriages may never have materialized other wards.

Institutional investors saw opportunity when they evaluated the business model for Alibaba. Here was a company that had been started in 1999 as an electronic bulletin board designed to facilitate trading. The model was unique in many respects and offered participants a new paradigm of trade for small to medium size companies in China. Softbank Corp. (Fidelity), Granite Global Ventures (GGV Capital) and Venture TDF Technology Group were all early stage investors.

Besides a legion of individual investors, 8 firms agreed to invest in the Alibaba IPO in 2007 and hold the shares for at least 24 months. Those ‘cornerstone’ investors included several global investment concerns.

The extremely high valuations (PE-94.5 and 106.3 times 2007 earnings), at the time of the IPO would normally have scared off most institutional investors, but this is China. Models that have worked in more mature markets should prove to be a good bet in emerging markets, or so it goes. 85% of the offering last year was set aside for institutional investors. $1.5 billion was raised as the firm’s IPO was a huge success.

When the Microsoft/Yahoo deal fell apart, it resulted in a steep drop in Alibaba’s stock price earlier this month. (May-2008). Alibaba’s stock price dropped 5.9% in just one day. This was reminiscent of the drop that occurred shortly after the IPO. That drop was significant and reminded investors that the old rule about reasonable multiples is not to be ignored.

From 2002 to 2006, Alibaba saw an increase in revenues of 379%. The early investors have had reason to believe that the sector-leading model was well worth their attention. Later investors are still holding fast to some of the fundamentals of the growing market in China. The marketing wherewithal of the small and medium sized manufacturing base along with a thriving entrepreneurial spirit has created a machine that can grind out products for consumers worldwide.

While the recent news about health and safety concerns seemed to throw a wet blanket over the roaring Chinese manufacturing and export machine, it is unlikely to affect Alibaba’s success. Americans, Japanese and Europeans go to the store and find products that they want to purchase. Many of those products still say; Made in China, and many may have found their new owners because of Alibaba.