Americans need to beware of investing in Alibaba despite hype


This Friday, Chinese Internet commerce company Alibaba will debut its initial public offering on the New York Stock Exchange. It is one of the most highly anticipated IPOs of the year, and one of the most hotly contested in recent memory. The company is expected to raise around $25 billion in investments, which would be the biggest IPO in U.S. history. Before discussing some of the risks and dangers of trading with Alibaba, it’s important to clarify what exactly this Chinese behemoth does.

Many have compared Alibaba to Amazon and eBay combined. That might sound daunting — and it is. In reality, Alibaba most resembles eBay in its consumer auction site and its online payment system, which is similar to PayPal, called Alipay. Alibaba’s business is heavily diversified. It runs a service like Amazon under the name Tmall. Despite Alibaba’s many services, much of its revenue stems from Taobao, China’s largest online shopping service, and Alibaba.com, an online network that connects Chinese exporters with merchants around the world. It’s easy to see the lucrative value in a company such as Alibaba. Yet, a closer look at the dealings of the company and its presence in the U.S. stock market reveals that China’s sweetheart tech company might not be the darling Americans think it is.

In 2010, Alibaba’s founder and chairman Jack Ma gave controlling interest of Alipay to a group he was a part of in order to comply with Chinese central bank regulations. American groups like Yahoo! and SoftBank Corp believe this was a conflict of interest because Ma had been forming deals that benefited groups outside of Alibaba that he’s a part of, blurring the line between public market and private holdings. Additionally, Ma and others borrowed $1 billion to invest in Chinese television and cable. As one portfolio manager put it, “Alibaba’s balance sheet is being used to finance an acquisition by Jack Ma and others.” The overall trend in Alibaba and Ma’s business dealings paint a picture that depicts insider trading, the use of company funds to invest in other business opportunities without the consent or basic knowledge of shareholders.

In light of Alibaba’s IPO rise from $66 to $68 per share, some have argued that the risk involved in investing is negligible because the company has so much room for expansion. What those voices fail to recognize is that Alibaba is a foreign company, meaning that it is not eligible to trade on the S&P 500 index, where it could have more of an impact on the overall market. Alibaba is not even taking the lead of Baidu or other Chinese companies to trade on the NASDAQ, where most American tech companies like Apple and Facebook trade.

Make no mistake, Alibaba is surging. It hopes to command a market value of up to $167.6 billion, 29 times more than estimates for yearly earnings. The issue with Alibaba resides in its murky business practices and nascent presence in U.S. markets.

In China, Alibaba will continue to dominate, but abroad, the company will have to understand the subtleties of the U.S. market and consumers while competing with other tech companies like Netflix and Amazon. Let the buyer beware. Time will tell if Alibaba will perform well on the NYSE and demand a share price it so adamantly believes it can live up to.
Athanasius Georgy is a sophomore majoring in biological sciences. His column, “On the World Stage,” runs Thursdays.