Is the Alibaba euphoria going to last? 9 things you should know about the IPO

Alibaba Group Holding, which is one of the largest e-commerce companies in the world, listed itself in New York, giving people a chance to buy into one of the biggest business phenomena in the world today: online shopping. Alibaba's prices rose 38% on the first trading day of the exchange. Here are nine things you need to know about the IPO.

1. Alibaba has seized 80% of the market share of China's e-commerce market, which was estimated at 1.85 trillion yuan ($297 billion) in 2013, accounting for 7.8% of total retail sales in the country. Alibaba operates through three sites: Taobao, which is China’s biggest shopping site; Tmall, which  focuses on online sales of branded goods and thus targets the fast-growing middle class population, and Alibaba.com, which connects Chinese exporters with companies elsewhere in the world. It also has Alipay, which holds the money paid by the customer till the good is delivered to him, but is not a part of this IPO. Unlike eBay, it does not charge for listing items, but charges mainly for advertising. 

2. How big is Alibaba? Forbes tells us that Alibaba, through all its sites, "hosted $248 billion of online shopping transactions last year, which is, according to the Wall Street Journal, more than eBay and Amazon.com combined". According to some estimates, China’s e-commerce market has risen from $74 billion in 2010 to $295 billion in 2013. This is expected to go up to $713 billion by 2017. Investopedia says, "Essentially, Alibaba is eBay, PayPal, Amazon, Amazon Web Services, and many more rolled into one."

3. Alibaba founder Jack Ma had begun the business in 1999 in a small room which has grown into the behemoth it is today. One of the turning factors for Alibaba was Yahoo's $1 billion investment in the company in 2005. Yahoo was slated to gain roughly $9 billion from the Alibaba IPO, and still would retain almost 16% stake in the company. Many media reports speak of Yahoo's gains as some kind of "windfall". However, isn't that what smart investments are made of: putting in money when no one believes in an idea?

4. Alibaba raised $21.8 billion in a listing which was not its first attempt to go public. It had listed the website alibaba.com in 2007 in Hong Kong, but went private again in 2012.

5. The excitement around buying into the company's growth was evident much before the listing. There are hardly any other big offline brands that have loyalty value in China, and the subscription for the stock was much higher than what it offered. As a result, Wall Street Journal reports, "Over 1,700 investment firms world-wide put in orders for Alibaba shares, according to people familiar with the matter. About half of them got no stock, and many others got less than 5% of what they asked for, the people said." However, some 25 companies were sold half the stocks up on sale in the IPO, which is a very high concentration of ownership when a company that big goes public.

6. This also explains why the stock jumped 38% when it listed. Since several big institutions could not get even half of the stocks they had asked for, and many retails investors would be left out of the deal, they would try to lay their hands on the shares when it became public. Institutions that got a sizeable portion could look at buying more to consolidate their shareholding in the company. At closing, its market value stood at $230 billion on a fully diluted basis on the first day. According to some brokers, it was retail demand that was driving the price up.

7. Alibaba is valued at 39 times its estimated earnings per share for its current fiscal year, which ends in March. That is right in line with Facebook's valuation of 39 times forward earnings but nowhere near the lofty valuation of Amazon.com's multiple of 264, according to Thomson Reuters Starmine data.

8. The relationship between the promoter and chairman Jack Ma with the company will also come under greater scrutiny. Ma reportedly wanted to list in Hong Kong and not in the United States. But Hong Kong would not allow the dual class listing structure, where by Ma and his associate leaders would nominate more than half of the board members though they do not own that much shares. Hong Kong Exchanges and Clearing Ltd, which operates the exchange, has a policy against companies having multiple classes of shares with different voting rights, but is now considering loosening those rules.

As Investopedia has also reported, Alibaba's filing for the IPO has promised that it will strive to limit Ma's personal gains in the company. Moreover, the dealings with the Chinese government and the government officials will also come under the scanner, and the methods of earning profits of distributing shares will be questioned more rigorously.

9. The final issue is the concern regarding the valuation itself. The gross merchandise value for the company stood at $296 billion for the year ending June 2014. This is far higher than Amazon. But the revenue stood at $8.5 billion, compared to $74.5 billion for Amazon. But Marketwatch explains how Alibaba is more profitable. "In the three months through September, the most recent numbers available, Alibaba's revenue rose 51% to $1.776 billion from a year earlier. Net profit stood at $792 million, giving the company a net profit margin of 44.6%, according to shareholder Yahoo Inc, which owns a 24% stake in Alibaba. In the same quarter, Amazon posted a loss of $41 million on revenue of $17.09 billion." How this story pans out, and exact scrutiny of the business model and corporate governance practices will show how Alibaba fares in future.