IPO Watch: Is Alibaba's Slowdown Cause for Concern?

Ahead of one of the most anticipated IPOs in history, Alibaba's growth seems to be slowing down, especially in comparison with that of rival Vipshop.

Jun 24, 2014 at 6:44PM

Without a doubt, the initial public offering of Alibaba is one of the most anticipated events for investors this year. The Chinese e-commerce giant, in which Yahoo! has long had a significant stake, is known for its massive growth figures, and many investors are eager to cash in on the company's success. However, its most recent sales figures point toward a slowdown in growth, which has Yahoo! investors worried. What can we expect from the company as we head toward an IPO?

The piping-hot IPO
Overall, tech IPOs have been on fire as of late, with a large number of companies offering stock for the first time. Fears of a massive tech bubble seem to be overplayed at the moment. In this wave of tech IPOs, Alibaba's offering is without a doubt the most anticipated.

The interest in Alibaba is easily explained. The company has a massive scale,  having sold more than $240 billion in goods last year, more than Amazon and eBay combined . Its expected IPO of $15 billion would be the second-largest tech offering in history, second only to the $16 billion offering of Facebook in 2012. In fact, the size of the IPO may well exceed this. Moreover, the company delivered absolutely staggering growth over the last few years, which has also benefited major stakeholder Yahoo !.

As we near the IPO date, which is expected in early August, the company has disclosed some additional information on its inner workings. The company listed the nine members who will serve on its board after its offering, and also named the 27 members of its partnership structure who will have the power to nominate the majority of the company's board . However, the company also released some of its most recent financial results, and they point toward a slowdown in the company's sales growth.

Time to worry?
While Alibaba's growth figures remain well above those of its major US competitors, its growth has slowed significantly from last year. In the fourth quarter, revenue grew by 39%, down from 71% last year and the first time in six years of reports when this number dipped below 40%. For the full year, revenue growth came in at 38.7%, compared to 52% in 2013 and a whopping 72.4% in 2012. Additionally, operating margin contracted from 51% to 45% year-over-year. Following the release, Yahoo! stock dropped more than 5 %. However, some commentators point to the fact that sequential growth has never been particularly strong for the company between Q2 and Q3, and that a slowdown is natural for a maturing company. Management didn't have much to say about the figures, but refuted claims it was holding back on generating profits ahead of the IPO.. 

Compare these numbers to the most recent figures from one of its local competitors, Vipshop (NYSE:VIPS). Vipshop is still coming out with some fairly mind-blowing growth figures, and is showing no signs of a slowdown just yet. Its first-quarter revenue growth came in at a massive 126%, owing to an 165% increase in the number of active users and a 129% increase in orders. Meanwhile, gross margin increased from 23.4% to 24.9%, while net income increased by a staggering 355 %. Management comments that growth was "robust" for the first quarter seem like a bit of an understatement. To be fair, the two companies have a different business model, Vipshop focusing on a selected range of goods marketed in flash sales versus Alibaba's marketplace model. Additionally, Vipshop is much, much smaller, earning only $1.7 billion in net revenue in 2013, which gives them considerably more room to grow. 

The bottom line
As we draw closer to one of the most highly anticipated tech IPOs in history, Alibaba has disclosed some additional information to prospective shareholders. Not all of it was well received. The company's growth has slowed to its lowest pace in six years, and margins seem to be contracting. This isn't good news for Yahoo! shareholders either. Interestingly, one of the company's major competitors in China, Vipshop, seems to be having no trouble sustaining triple-digit earnings and revenue growth, perhaps making it a more enticing choice in the space, although its smaller size makes growth more easily attainable.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Facebook and Yahoo. The Motley Fool owns shares of Facebook and Yahoo. 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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