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Can Alibaba IPO Give eBay & Amazon a Run for Their Money?

Zacks Equity Research

Alibaba reported strong results in its fiscal first quarter ending in June, which is likely to support stronger pricing as the company heads for its IPO. The results also show that Alibaba is far more profitable than its illustrious competitors Amazon (AMZN) and eBay (EBAY) combined.

Financial Details

Alibaba’s filing with the U.S. Securities and Exchange Commission revealed that the Chinese e-Commerce company earned more than what its competitors, Amazon and eBay did in the June quarter.

Alibaba’s revenues increased 46% year over year to $2.54 billion, higher than the 38.7% growth recorded in the first quarter. Its operating income rose to $1.1 billion, or 42% more than the combined profit of Amazon and eBay for the period.

After including one-time gains, net income attributable to Alibaba's ordinary shareholders nearly tripled to $1.99 billion (84 cents per share) — more than double the amount earned by its competitors. The comparison was helped by the fact that Amazon made significant investments and resorted to aggressive pricing, which led the company to report an operating loss for the period.

Moreover, for the three months ended Jun 30, 2014, Alibaba sold 501 billion RMB ($81.6 billion) worth of merchandise through its e-Commerce marketplaces. On the other hand, eBay reported $20.49 billion in gross merchandise value (GMV.V) and Amazon sold a total of $15.25 billion worth of goods, which translates into $25–$30 billion in GMV.

Mobile Transactions

And that’s not all: Alibaba has made full use of the exponential increase in smartphones and tablets. Its online payment service, Alipay, is far more comprehensive than eBay’s PayPal. Alibaba’s services include quick bank transfers (money transferred in two hours), Alipay account transfers, payment of credit card and utility bills at no extra cost, mobile recharges with credit, bank balance check, bus ticket purchases, online checkout on many sites and in-store payments.

The SEC filing reveals that Alibaba’s mobile sales accounted for 32.8% of second-quarter GMV, up 27.4% on a sequential basis and 12% from the year-ago quarter.

Huge Scale

Alibaba, the Chinese e-Commerce giant, caters mainly to the Chinese market where population density is very high. Like eBay, it operates as a marketplace and does not own any of the goods. Amazon is more of a retailer, directly procuring, storing and delivering goods for a margin. It also operates a third-party marketplace.

Alibaba’s business-to-business (B2B) online portal brings together Chinese manufacturers and foreign buyers from more than 240 countries. Additionally, its consumer-to consumer (C2C) retail shopping platform offers a billion products through Toabao and business-to-consumer (B2C) Tmall portal. Alibaba has been looking to international markets to expand its business and its growth plans in the U.S. include a low-profile website with an American name -- 11Main.com.

A Strong Competitive Edge

Armed with more than 20,000 employees, Alibaba serves about 80% of the Chinese e-Commerce market. China, one of the world’s fastest growing economies, is on course to become a central player in the global e-Commerce industry. The low-cost, widely available telecommunication infrastructure in China has increased the popularity of online shopping.

According to the global management consulting firm Boston Consulting Group (BCG.V), Chinese Internet users will soar to 730 million in 2016 from 460 million in 2010. Another impressive forecast is that the number of online shoppers will skyrocket to 380 million through 2016, from 145 million in 2010.

Overall, the e-Commerce industry will account for 7.4% of China’s total retail value by 2015, up from 3.3% in 2011, indicating exceptionally high growth compared with the U.S., which took almost a decade to reach that level.

Bottom Line

With a huge market presence, planned expansion in the U.S., strong business model and immense future growth prospects, we believe that Alibaba enjoys a competitive advantage and sales flow.

Alibaba, owned by Yahoo! Inc. (YHOO), Japan’s Softbank Corp. as well as other founders and senior managers have scheduled an IPO shortly after the Labor Day, which has historically been a solid time for IPOs. The closely watched and highly anticipated IPO is expected to have a huge impact on the U.S. market. Listing on the U.S. stock market will further support Alibaba’s long-term expansion and growth strategies.

Currently, Amazon’s shares sport a Zacks Rank #4 (Sell), while eBay’s shares carries a Zacks Rank #3 (Hold). Other stocks from the same sector is Chinese ecommerce company Ecommerce China Dangdang (DANG), which sports a Zacks Rank #1 (Strong Buy).

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