The Alibaba Heist

Those outside of China who ever heard of Alibaba are probably familiar with the "trade lead" site where buyers and sellers can "hook up" internationally.  I've always advised against "trade lead' sites, even before the internet in their newsletter versions, because they are usually people with no customers talking to people with no supply, with a large contingent of scammers standing by.  I've characterized it as trying to drink from a fire-hose of sewage when all you want is a sip of clean water.  What I learned long ago was to work directly with that sip of clean water (the best suppliers and customers) and ignore the trade leads.  Indeed, one of the myriad steps in due diligence is to make sure a supplier or a customers is NOT on alibaba.com, for a busy, top company would not bother with that desultory exposure.

Alibaba also once had a JV going with Yahoo.com that gave alibaba.com some stature in USA, but that was severed when reputation issues where hurting Yahoo.com.

Today Alibaba is ebay, youtube, paypal, einsurance, google, sprint, geico, fedex, twitter, facebook, amazon, and everything else all in one. Is that a good idea?  Think management issues.

As a side note, I do like the idea of an economy that is so integrated and comprehensive that it acts in the place of any government.  Alibaba.com would be an example of what comparative law theorists call "private law."  It would be, except it is an invalid instance: private law grows organically along anarchistic lines, it is not a plot hatched by a few dozen people and financed by Goldman Sachs.

I've been looking for a reason why Alibaba would be a good buy, and about the most significant explicator I can find is here:

Michael Tudor, founder and CEO of New Jersey-based Ripen eCommerce, said small- to mid-size businesses can look at Alibaba as a shortcut to reaching the massive Chinese e-commerce market.
"Tmall (one of Alibaba's marketplaces) is a particularly brand-friendly marketplace for a number of reasons, including small commission rates and the fact that it doesn't sell merchandise of its own, unlike Amazon," said Tudor. "At the same time, Alibaba.com is a business-to-business site that connects manufacturers with retailers around the world. No other site has been able to streamline the connection between manufacturers and buyers."

Delusional, or fraud.  First, Alibaba can do nothing about physics, the cost of moving goods.  You can get $150 for a live Dungeness crab in Beijing.  But you have to get it to Beijing.

The fact that amazon.com does compete against its clients is the reason, albeit counterintuitive, that Amazon.com took the lead.  The lack of exclusivity allows the best to rise, not all too often crowd them out.  Alibaba.com may have eschewed a critical factor.

Second, what does a $20 billion (or whatever) flow out of USA pensions into Chinese tallies do for the USA small to mid-size businesses (not to mention the pensioners)?  Alibaba has been around since 1999.  There is nothing that will be improved in the next year that was not available in the last year.  At no time did Alibaba have any advantage that was not otherwise available in the last fifteen, nothing in the next fifteen that will be unique to Alibaba.  So where is the advantage in having moved $30 billion tally in pretend pension contributions onto Alibaba's books, in exchange for stocks held by pensions?

Third, what's for sale?  Let's read the prospectus:

(alibaba is) the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013, according to industry sources.

What industry sources?  No telling...  and a company in China that is "all-in-one" is likely, should be, the largest in the world.

Now what is for sale with this stock is a couple of websites... alibaba.com, taobao, etc...  all those other functions are part of the alibaba.com "ecosystem" -

Given the scale we have been able to achieve, an ecosystem has developed around our platform that consists of buyers, sellers, third-party service providers, strategic alliance partners, and investee companies. Our platform and the role we play in connecting buyers and sellers and making it possible for them to do business anytime and anywhere is at the nexus of this ecosystem. Much of our effort, our time and our energy is spent on initiatives that are for the greater good of the ecosystem and the various participants in it. We feel a strong responsibility for the continued development of the ecosystem and we take ownership for this development. Accordingly, we refer to this as “our ecosystem.”

So all those Chinese third party providers, strategic alliances, investees, are not part of what one is buying, but they all benefit from you buying the stock.

And what is Alibaba's China market penetration?

Well, their graphs are selective, but in mobile they claim a 76% market share in China online sales. Wow.  In a country, China, where 7.9% of retail sales is online.  Wow!  That is about 20% more  internet market penetration total in China than internet market penetration in the USA.  In USA only about 6% of retail sales is online.  When I ask in classes what per cent people think occurs online in USA, usually they offer a figure say 50% or higher.  They are astonished to learn it is so little.  And then I go on to say "why is it not higher?  There is nothing to keep it from having gone higher yet, and maybe it will get to 8% (where China is) but I doubt it will ever go above that. " (Back in the 1980s when every was a sure most retail took place out of catalogs, then too in boom, penetration never got about 8%.  There are rational limits.)

Online sales has maxed out its viability, and has yet to prove profitable. Apparently so does Amazon, who is yet to turn a profit with online sales, offers seminars on what may work to make online sales profitable  (who knows, it's never been done), and at the same time is trying to get into industrial supplies sales online.  (It usually costs more to attract a customer online than the profit from a sale.)

That Alibaba "76%" is GMV.  Gross merchandise volume.  That is, including returns and dissatisfaction. That 7.9% is entire China....  Hmmm....  AS one day google took over the search from yahoo, and Apple took computing away from Microsoft, is it possible there is something preferable to alibaba.com?

For a company of this size that made only $1.6 billion net before taxes and payouts FY 2013, and that if only

Non-GAAP MeasuresWe use the non-GAAP financial measures of adjusted EBITDA, adjusted income from operations, adjusted net income and free cash flow in evaluating our operating results and for financial and operational decision-making purposes.

Strikes me as rather tight, even if whimsical.   And if they are turning such a profit, why go borrow $3 billion in August from the very bankers who are underwriting the September IPO?  Although no reason is given for the $3 billion dollar loan a month ago, perhaps it was a down payment on the fees the banks will make, $3 bil being about 10% of the IPO.  Prepaid in case the coming crash comes before the IPO?  In any case, the price surged 40% on top of the richly priced $68.00.  No crash yet. Ka-ching.

Why USA?  Why is a Chinese website raising its IPO money in USA?  There is a perfectly good stock exchange in Shanghai, but China tends to shoot people who do very big fraud.  I have no idea if this compelled the Alibaba crew to seek money elsewhere, but Hong Kong turned Alibaba.com down too.  Are you kidding?  No place that values the rule of law, peace and prosperity would ever allow a website like Alibaba.com to do an IPO on the HKEx.  So what does that leave?  O yes, USA!

No matter what happens, the usual suspects made a killing off fees and fast-trading:

Six firms were listed as Alibaba’s lead underwriters, listed mostly in alphabetical order: Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citigroup. They emerged as winners for the honor of running an I.P.O. that could ultimately end up raising more than $20 billion.

The alibaba.com offer is for a scope and scale that is unmanageable, the model is false-economy based, the content is apparently maxed out, and the funding is pension's desperate need for yield.  It's Enron on 'roids.  It may be crazy, but it is tradable.

On the other hand, had dim sum yesterday with a rep of a freight forwarder firm based in Chile.  He laid out the strategy and tactics on building new markets for their business by assisting certain segments of markets in various countries.  It all made sense, they'll make money, business will grow.  The "get big or get out" thing has failed.  The pendulum is swinging back.  There is money to be made at the small business level.  It is people with real products selling to people with real customers that is real economy based.  These people are why there are clothes on you back and food on your plate.  Nothing terrible exciting, but it's a lifestyle.

 Alibaba has nothing to offer those people.  But it is a way for a few people to become billionaires, and others to imagine they could, if that is your definition of wealth.

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