Chinese e-commerce leaders JD.com and Alibaba have both filed for IPOs, creating two of the biggest IPOs this year, challenging Amazon (NASDAQ: AMZN ) as Wall Street's favorite online retailer. While the timing of their filings appears in unity, it more than exemplifies a competitive nature of not allowing one to gain an advantage over the other, such as investments in Weibo (NASDAQ: WB ) and from Tencent Holdings (NASDAQOTH: TCEHY ) . However, given the cash both companies are about to earn, and the ever-growing competition, don't be surprised if Vipshop (NYSE: VIPS ) becomes a spotlight stock.
2 new e-commerce companies to hit Wall Street
The filings have occurred, and one day very soon, both Alibaba and JD.com will be public companies on U.S. markets. These are two of the most anticipated IPOs of the last few years, especially Alibaba, as the growth of both companies is stunning. While similar as e-commerce juggernauts, the two are very different, as Alibaba creates the majority of its revenue through advertising, and JD.com's business model appears similar to Amazon.
In regard to Alibaba, its IPO filing showed revenue of $5.5 billion in 2013, growth of 73% over 2012, and net income of $1.35 billion. The company created this revenue with its industry-best $248 billion worth of gross merchandise volume, including more than 230 million active buyers. The company's valuation is expected to fall in the range of $150 billion-$200 billion, and in selling a 12% stake, it should raise $18 billion-$24 billion.
JD.com filed a $1.5 billion IPO back in January, which has likely risen, and many believe the company's market capitalization will now exceed $15 billion. As previously noted, the company operates a business strategy that is similar to Amazon, thus investing heavily into its own company, including its own couriers and warehouses.
JD.com saw growth of 71% in the first nine months of 2013, creating revenue of $8.04 billion and net income of $10 million. Hence, with a profit margin of 1.2%, JD.com not only looks like Amazon, but is considered by many to be a second chance to invest in fast-growing Amazon.
Their growing competition
Despite the size disparity between these two companies, with Alibaba clearly being larger, JD.com and Alibaba are highly competitive, neither allowing the other to gain much of an operational advantage. This is most evident in the timing of the IPOs, but also investments in social media channels to bolster advertising presence. In many ways, they follow each other's lead.
Specifically, Alibaba is a large investor in Weibo and owns 32% of the company. Last year, Weibo's revenue growth increased 190% to $188 million, and Alibaba's advertising/marketing sales accounted for 26% of its total revenue, a figure that's expected to rise. Thus, with Weibo's monthly active users growing 33% year over year, and at 129.1 million, Alibaba likely made a good investment.
JD.com followed Alibaba, with a partnership in Tencent's WeChat. In particular, Tencent purchased a 15% stake in JD.com, which occurred in March. Essentially, this helps both companies, as it increases JD.com's exposure and will likely drive revenue growth for WeChat. For Tencent, WeChat has become increasingly valuable, as it finished its last quarter with 355 million monthly active users, an increase that's 121% over last year and three times larger than Weibo's users.
Where might they spend new money?
After the Alibaba and JD.com IPOs are complete, both companies will have a substantial amount of cash to spend. Therefore, with each company seeking a competitive edge, Vipshop might make an intriguing stock to watch.
Vipshop is another Chinese e-commerce company, smaller than JD.com, that operates a much different strategy of flash-selling. Essentially, the company buys products in bulk from its 350 different partnered brands, then sells certain goods at specific times. Hence, the increased quantity allows for cheaper prices, as brands are willing to work with Vipshop for promotional reasons.
On Wednesday, the company reported earnings, producing quarterly revenue of more than $700 million, good for year-over-year growth of 125.9%. Moreover, it expects growth of 118% in the second quarter and $785 million in revenue. The company saw its gross margin rise 150 basis points to 24.9%, and its number of active customers increased 5.6 million to 7.4 million total.
Vipshop is becoming a legitimate e-commerce company, and therefore, it's a growing threat to Alibaba and JD.com. With Vipshop's market cap being $10 billion, its valuation is relatively similar to JD.com's implied worth. However, a combined Vipshop and JD.com would create quite a power to battle Alibaba.
For Alibaba, Vipshop would give it access to an e-commerce channel that is growing rapidly, including its flash-sales model, which also provides access to more than 350 brands that may be willing to discount aggressively.
The final scenario is an Amazon take-over. Already, plans have been discussed of Alibaba and JD.com entering U.S. markets. Hence, Amazon acquiring Vipshop would give it a growing channel and a presence in China, perhaps even a hedge against Alibaba and JD.com.
Regardless, JD.com and Alibaba are likely to remain competitive, and even more so once becoming a public entity. After successful partnerships with fast-growing social media channels, the next phase might be to absorb the competition. Examining the market, Vipshop looks like the best option, a company that would add value to any platform.
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