Alibaba’s stunning American IPO signals confidence in Chinese economy

JUDY WOODRUFF:

The Chinese e-commerce giant, Alibaba, took Wall Street by storm today. The company had its initial public offering on the New York Stock Exchange, and it appears to be the largest of all time; 100 million shares traded in the first 10 minutes. More than $25 billion was raised.

It's a moment that highlights the power of China's growing middle class.

Hari Sreenivasan has the story from our New York studios.

HARI SREENIVASAN:

To give you some sense of the company's size, Alibaba earned more last year than Amazon and eBay combined. The company was founded 15 years ago and is often described as combining elements of Google, Amazon and eBay into one Web operation.

The firm, co-founded by a former teacher, Jack Ma, is now valued at more than $230 billion. Shares opened with a frenzy today and closed at nearly $94 each. Yet, for all of that, Alibaba is hardly a household name in the U.S.

To help fill in the picture, I'm joined by David Kirkpatrick, a technology writer and founder of Techonomy, an annual conference looking how technology is changing business. He's also author of "The Facebook Effect."

So we have heard a little bit about Alibaba. But why was it so significant an opening today?

DAVID KIRKPATRICK, Founder, Techonomy:

Well, I think the company was brilliantly market in the IPO process.

And it's the first time a major Chinese Internet company has gone public in the United States. And it's the most important Chinese Internet company, although there's a lot of competition for that. There's two other gigantic companies.

But I think also Jack Ma, who is the CEO and the founder you mentioned, is a uniquely charismatic individual who just generated enormous excitement among investors.

HARI SREENIVASAN:

So, they describe this as a mix of Amazon, eBay. Explain how — what does Alibaba do?

DAVID KIRKPATRICK:

It's a hard thing to explain, because Alibaba does so many different things.

It started out kind of being a broker for particularly people outside China wanting to buy Chinese goods, B-to-B, right? That was the first big business they had. Then they got into a more eBay business inside China, where, you know, small retailers would sell to consumers, et cetera, et cetera.

And now they have this very popular business on top of those other businesses called Tmall, which is a business where established brands sell to individual consumers. Like, a major U.S. consumer brand would have a Tmall site, and then Chinese consumers would buy from them via Alibaba.

But they also have their own logistics and delivery company. They have their own payment service. They have their own money market fund, which is one of the biggest in China because it offers higher interest rates. They just bought half of a soccer team. They just bough a movie studio.

They are really unbounded in their ambitions, but they're still primarily an e-commerce company.

HARI SREENIVASAN:

And how successful are they at e-commerce?

DAVID KIRKPATRICK:

So successful that they almost have a monopoly position in the Chinese Patrick.

Over 80 percent of e-commerce transaction in Chinese go over Alibaba. And e-commerce is more relatively important in the Chinese economy than it is in the U.S. economy.

HARI SREENIVASAN:

And not all Chinese people are on the Internet yet.

DAVID KIRKPATRICK:

No, only about half of Chinese citizens are on the Internet. And pretty much anyone of the Internet in China is likely to be an Alibaba customer.

HARI SREENIVASAN:

And so when…

DAVID KIRKPATRICK:

So, there's as lot of upside.

HARI SREENIVASAN:

Yes. The specific IPO, why did so many investors, especially institutional ones, want to get in on, even at this price, which was adjusted hiring and higher throughout the week?

DAVID KIRKPATRICK:

Well, as I heard somebody say today, the margins on this company are way higher than the average Internet company.

They make 40-plus operating margins, profits. That's a really high amount of profit for an Internet company. And they have 80 percent market share in their primary market. That's like all money investors need to hear. And the growth has been very, very strong in recent quarters.

So, you have got a fast growing company, with high margins, and dominant market share. Investors understand that kind of language.

HARI SREENIVASAN:

Is this in some ways a proxy bet on the Chinese economy?

DAVID KIRKPATRICK:

Yes, I think that's a really good way to think about it. It's a really positive way to think about it, that, in effect, by so many Westerners buying this stock at such a high price, they're saying, China is our friend. We believe in the future of the Chinese economy. We believe in the future of, in effect, the Chinese government, because let's face it, the way business works in China, if the government doesn't want it to happen, it doesn't.

So there's a much tighter bond between the government and business in China. And even Jack Ma today said, you know, the whole way he has operated his company throughout its history is, be in love with the government, but don't marry it. Try to do what the government wants.

HARI SREENIVASAN:

So, live by the government, die by the government.

DAVID KIRKPATRICK:

Apparently.

HARI SREENIVASAN:

What are the sort of downsides on if Chinese government policy changes that could have a ripple effect on the share price today?

DAVID KIRKPATRICK:

There's certainly a potential downside there.

But I think the Chinese government appreciates so much what Alibaba is doing economically, and also even today what it's done for the image of China. I think you're not going to see them coming down hard on Alibaba anytime soon. But, theoretically, you have never seen such an important company be so wedded to one government's policies.

HARI SREENIVASAN:

OK. There are obviously always investors who think this is too rich a price. What are the concerns about where the stock is priced and what the future of this company is?

DAVID KIRKPATRICK:

Well, there are always concerns.

Certainly, valuation is now a very significant concern if you're a cautious investor. It's got a high multiple now. But there's two sort of big other questions. And the first is the one we just mentioned, which is government influence and regulatory change, because, in China, if the government regulators decide something different that you didn't expect, your whole business can go out the window overnight.

I don't think that is going to happen here. The other, though, is the governance of Alibaba, the way it's structured as a business, is extremely complex and labyrinthian and not very transparent. So investors don't have the window into what's really happening inside the company that they would have with a Western company. It's not audited in the same way.

I mean, what people bought today is not even the actual assets of the company. They bought shares in a Cayman Islands-based holding company that gets profits from Alibaba, and has an ironclad deal to get the profits. At least they say it's ironclad. But it's not the assets of the company.

That's a very — that's — it's not unusual for the Chinese Internet to have that kind of a deal, but it's not the way, you know, Western investors typically invest.

HARI SREENIVASAN:

Yes. All right.

David Kirkpatrick, thanks so much.

DAVID KIRKPATRICK:

Thanks for having me.