The Alibaba IPO: eBay and Amazon at Risk?

Online marketplaces, step back: Alibaba is coming to town.

Mar 26, 2014 at 6:30PM

Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) take note: A huge e-commerce player is going public in the U.S., and there may not be room for everyone. Western customers will soon have the option to bid on, buy, and book deals with the Alibaba Group, which already owns 45% of China's e-commerce market and is eager to expand. The initial public offering is so highly anticipated, it is drawing comparisons to Facebook. Alibaba's IPO could yield as much as $15 billion or more, and the company is valued at about $140 billion. These are exciting numbers for those bullish on e-commerce or China tech, but where one star rises, others risk fading.

While few Westerners currently use its services, Alibaba is one of the largest Chinese e-commerce sites, with early beginnings in 1999 as a business-to-business company working with Chinese manufacturers. It eventually developed into an online marketplace and started moving into business-to-consumer territory. Today Alibaba, like Amazon or eBay, owns and invests in a diverse group of businesses, ranging from Taobao Travel to ShopRunner.

Competition in the works
Calling the company a competitor with the likes of Amazon and eBay may be a stretch, but mostly due to geographic separation. Alibaba's customers and investments are in the Asian market, while Amazon and eBay focus on the Western front. However, the decision to hold an IPO in the U.S. instead of Hong Kong, the previously expected option, may show intent to move further into Western territory held by more familiar online marketplaces.

The amount of competition that Alibaba could offer is significant. The company is expected to report revenue at $7.6 billion for its 2013 sales, a jump of 55% from 2012. Taking all portals into account, Alibaba already moves more goods than Amazon and eBay combined.

If Alibaba does make itself more Western-friendly by continuing to build e-commerce sites like ShopRunner, will competitors need to respond? eBay saw an earnings increase of 9% and revenue growth of 14% last year. Its stock price was up by 8%. These are stable numbers, but cannot match the powerhouse growth of Alibaba, which could provide a strong alternative auction for global customers. Currently, eBay is more concerned with its looming PayPal decision, as Carl Icahn encourages a spin-off of the payment service while others suggest that Google simply acquire the whole company. But once the PayPal hurdle is behind it, eBay may find a confrontation with Alibaba unavoidable.

The same market-share question can be asked of Amazon. How will the company deal with an e-commerce business three times as large that offers a number of similar small business services? Amazon had sales reaching $80 billion in 2013, benefiting from consumer interest in e-commerce. Its share price has doubled from 2010 numbers and Amazon has a market capitalization at around $150 billion. However, a low-margin philosophy and traditionally low profitability continue to raise questions about the future of its current business model. This may be the reason the company has increased its Amazon Prime rates.

Calling Yahoo!
As Alibaba's star continues to ascend, Yahoo! (NASDAQ:YHOO) deserves a closer look as well. Yahoo! currently holds a 24% stake in Alibaba, and its stock saw a 4% rise on March 17, when Alibaba announced IPO plans, indicating that investors see the connection between the two companies as favorable. With revenue falling 6% in 2013 and competitors like Google continuing to grow, Yahoo! needs the boost in confidence, but has its own tough choices to make. Selling Alibaba shares, particularly in the heyday following an IPO, could raise significant funds for Yahoo!, but it would also remove one of the company's brightest pieces of ownership. Currently Yahoo! has decided to sell up to 40% of its Alibaba shares.

No matter the choice, Alibaba is set to shake up the North American e-commerce world.

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Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and Yahoo!. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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