The Chinese e-commerce giant, Alibaba Group Holding Ltd, launched a stunning initial public offering at the New York Stock Exchange on Friday, Sept. 19, and has become the largest IPO ever in NYSE’s history. Alibaba’s shares rose 38 percent to $93.89 per share shortly after its debut, according to Bloomberg, raising $21.8 billion in the first day, more than any company in the U.S.
With its many record-breaking numbers, investors have reason to believe Alibaba is among the current most valuable companies in the U.S. Conventional wisdom dictates a positive correlation between economic and company growth assures that Alibaba will be profitable in decades to come. China’s continued economic growth will undoubtedly fuel Alibaba’s expansion.
Alibaba is undeniably the most successful company in China. In the e-commerce field, its current market share is 80 percent thanks to Taobao, a platform similar to eBay that allows buyers and sellers to do business efficiently online. Taobao also incorporates AliPay, a PayPal-like transaction system that makes online payments more secure. Alibaba has also revolutionized the way small businesses survive and even thrive in China by initiating micro-finance services.
Despite its promising future for investors, some potential risks to the firm’s future might not be noticeable yet. Those risks are different from the ones that Alibaba’s counterparts such as Amazon and eBay face. For American companies that operate mainly in the U.S., regulatory risks have been clearly known due to legal frameworks and a productive industry of legal service. Investors are relatively familiar with American companies and how these businesses are supposed to perform.
But Alibaba is not a familiar participant in America’s e-commerce market and isn’t well known among Americans. How the company operates, or what risks it would have in China’s legal system remains puzzling to many investors who intend to invest in its stocks. As Alibaba ambitiously takes on Internet finance, the biggest risk it faces could be from the economic policy and hurdles of the U.S.-owned banks.
Alibaba and other e-commerce companies have been working closely with fund-management firms to provide customers more options of saving and investing. AliPay offers funds with a higher return rate than similar products U.S. banks usually offer, sparking backlash from powerful U.S. banks. These banks have strong government endorsements, and they call for more scrutiny over Internet finance because customers are lured to the innovative and lucrative service Alibaba offers.
Given the monopolistic natures of the U.S.-owned firms, they might eventually lobby and press the government to limit the scope of or completely shut down the services that threaten them. Alibaba has been successful in the e-commerce field without meddling with U.S.-owned firms because the field was largely undeveloped at the time Alibaba was founded. But as Alibaba’s ambition and its desire to meet the needs of investors grow, it will expand into different economic sections where U.S.-owned companies might have some control. The conflict between them will be the unavoidable challenge in the future.
From a broader prospective, many American investors believe that China’s high growth rate will persist at least five or six years, creating a stable environment for Alibaba to grow. But empirical studies have shown that there is little correlation between economic growth and returns on stock markets. Finance Professor Jay R. Ritter of University of Florida, said in a 2012 paper that some developing countries such as China and Russia have witnessed dramatic decreases on average real stock returns, while experiencing high growth rate of GDP per capita during the 1990s to 2011. Ritter’s study also showed that shares of Chinese firms listed in the NYSE shrunk 1 percent on average within the span of three years following an IPO, whereas American firms’ shares grew 7 percent annually after IPOs.
That said, it by no means indicates that Alibaba is not a fascinating company with much potential. But investors should be more wary of the risks China’s regulatory system may pose to American stocks.
