Chinese e-Commerce Giant Alibaba IPO Could Be Biggest of 2014

Watch out, Twitter, there's a new IPO on the block that threatens to steal your thunder: Chinese e-commerce giant Alibaba (NASDAQOTH: ALBCF) is gearing up for a public debut in New York.

Alibaba is the parent company of Taobao, which dominates 95% of the consumer-to-consumer (C2C) market in China, and Tmall.com, which controls 50% of the business-to-consumer (B2C) market. Both websites are tethered to its electronic payment system, Alipay. Alipay is similar to PayPal, but withholds payments in escrow until a product is delivered.

Taobao.com. Source: screenshot by the author.

In other words, Alibaba is eBay (EBAY +1.19%), Amazon (AMZN +0.55%), and eBay's PayPal tied together in a single company that generated over $157 billion in sales last year -- more than double the annual revenue of eBay and Amazon combined. What's more impressive is that Alibaba's growth hasn't slowed -- simply compare its most recent quarterly top and bottom line growth to Amazon and eBay.

Sources: Alibaba company filing with Yahoo, Yahoo Finance as of 9/26/2013

Alibaba is convinced that this growth is only the beginning. The company predicts that its total annual sales will reach $471 billion by 2017 -- a 200% increase from current levels that would top Wal-Mart's annual revenue of $469 billion in fiscal 2013.

Although Alibaba originally planned its market debut in Hong Kong earlier this year, the Hong Kong Stock Exchange prohibits dual stock classes and other corporate structures that help founders maintain control of their company. Executive chairman Jack Ma, who founded Alibaba in 1999, has stated that he and his partners intend to retain full control over the company's operations after its initial public offering.

Therefore, Alibaba is now headed to New York, and the major banks, such as JPMorgan Chase, Credit Suisse, and Morgan Stanley, are vying for the role of lead underwriter.

What is fueling Alibaba's growth?

There are two major engines powering Alibaba's growth -- the rising middle class in China and an increasing rate of Internet penetration. This next chart shows why Alibaba is so confident that it can grow its top line by 200% over the next five years.

Sources: data compiled by Go-Globe.com, ChinaInternetwatch.com

However, that's not to say that Alibaba will simply march straight into 2017 unopposed. The e-commerce market, especially the B2C front, is getting extremely fragmented.

Companies such as Jingdong 360 and Suning, which respectively control 21% and 5% of the B2C market, are keeping Tmall.com's growth in check. Another rising company to keep an eye on is E-commerce China DangDang, the largest e-book store in China. DangDang has tried to replicate Amazon's success by introducing its own Kindle-like e-reader to the market.

Despite these challenges, Alibaba will remain the 800-pound gorilla in Chinese e-commerce for years to come.

Who are the major shareholders?

When Alibaba goes public in New York, it could make some shareholders very rich.

Yahoo! (NASDAQ: YHOO) was once Alibaba's largest shareholder with a 40% stake, and still owns a 24% stake in the company after selling a large portion of its shares back to Alibaba. Alibaba has been eager to buy back the rest of Yahoo's stake, which it originally purchased for $1 billion eight years ago. Alibaba has spent $7.6 billion so far reclaiming that stake, and is entitled to buy back an additional 10% of that stake after it goes public.

Under CEO Marissa Mayer, Yahoo! has used the proceeds of those sales to fund a series of acquisitions that culminated in its $1.1 billion acquisition of blogging network Tumblr earlier this year.

Alibaba's other major shareholders include Japanese telecom giant Softbank, private equity firm Silver Lake, and the China Investment Corp., a $200 billion sovereign wealth fund.

Will Alibaba be the biggest IPO of 2014?

When Alibaba goes public, analysts believe that the company could debut with a market cap of $120 billion -- matching the current market cap of Facebook and making it nearly four times as valuable as Yahoo!.

Alibaba is destined to be one of the hottest IPOs in 2014, but investors should take the hype with a grain of salt. Although shares of Facebook have recovered since its disastrous market debut last May, the harsh lessons remain.

Facebook was priced at the top of its IPO range, at $38, and the company and its underwriters flooded the market with too many shares. A price that was too high combined with an overabundance of available shares resulted in a 15-month slump before shares recovered their IPO price.

Investors interested in the Alibaba and Twitter IPOs should watch out for those warning signs as well. Hopefully, Wall Street has learned its lesson and won't sink one of the most lucrative long-term investment opportunities since Google's IPO in 2004.