The "Hidden" Billions in the Alibaba IPO

William Patalon III

How many times have you been reading about a long-ago historical event – or been watching a documentary about it on the History Channel – and thought to yourself: "Wow, it would've been really cool to have actually been there to see this happen."

I couldn't agree more. As a big history buff myself, I find myself making that statement on a regular basis.

But I'll also make this observation: The same folks who get so turned on about events from the distant past are often the last to recognize current developments – what you and I would refer to as "history in the making."

And one of the best current examples of "history being made" is the looming initial public stock offering (IPO) of Alibaba Group Holding Ltd. (NYSE: BABA), the Chinese Internet heavyweight whose shares are scheduled to price tomorrow and begin trading Friday.

If you at first find it tough to characterize a stock offering – no matter how big – as a "historic event," I can certainly understand.

But "historic" it is…

The Alibaba IPO is shaping up to be the biggest offering in U.S. history and could easily snag the title as the heftiest debut on Earth.

The transaction is likely to ignite several more years of exceptional growth for the company.

And the deal could bestow life-changing profits on investors shrewd enough to position themselves for something we refer to as the "Alibaba Shockwave Effect."

Before we explain how this Shockwave is spreading through the markets, let's give you the latest update on the IPO itself.

Setting the Standard

On Monday, Alibaba confirmed speculation that demand for its shares was so high that the Chinese e-commerce giant was forced to raise the share-price offering range from the initial $60 to $66 all the way to a range of $66 to $68.

At $68 a share, the company would raise $25 billion and have a market valuation of $168 billion.

Even the academics understand this is a "historic" event.

"Demand for Alibaba shares has been sufficiently strong that the order book is being closed early," Laurie Simon Hodrick, the A. Barton Hepburn Professor of Economics at Columbia Business School, wrote in a Fortune magazine essay published yesterday. "The increase in the offering price announced after [Monday's] market close, raising the maximum price from $66 to $68, could indicate in part greater overall IPO appetite and more investor confidence in growth prospects for other firms. Many Internet and tech companies have filed IPO paperwork but not yet gone public, including Box Inc., GoDaddy Inc., HubSpot, Lending Club Corp., and Vivint Solar. These firms await Alibaba's performance before moving forward with their own offerings."

Alibaba is dominant in its home market. And that market is soaring.

A Frenetic Market

In a brand-new report, analysts at the Australia and New Zealand Banking Group Ltd. said that China last year leapfrogged the United States to become the No. 1 online marketplace in the world. Online-shopping spending there reached $298 billion in 2013, easily surpassing U.S. sales of $263 billion.

And the growth rate was dizzying: According to German research firm yStats, China's consumer e-commerce market soared more than 60% in 2013.

Those are "rearview-mirror" numbers, though. When attempting to value a stock like Alibaba, investors demand to know: "What's next?"

The answer: China's online market will continue to zoom – and at a frenetic rate.

China's Internet population – 632 million people – is roughly double the entire U.S. populace. And the China Internet Network Information Centre (CNNIC) is projecting that the country's total online population will hit 800 million by 2016.

This isn't happening all by itself.

Beijing, you see, is doing all it can to fuel this advance.

China's leaders govern in part by crafting long-term plans that establish goals for the overall economy and for key sectors. Those plans also establish the policies, incentives, and catalysts needed to move those initiatives along.

In China's "E-Commerce 12th Five-Year Plan For 2011-2015" (that's what it's called), the Ministry of Industry and Information Technology focused on making China a true global powerhouse in e-commerce – and I mean a bona fide worldwide leader in this digital transactional realm.

And in that plan is a very interesting element – something I believe will benefit Alibaba in a major way.

William Patalon III

About the Author

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Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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