It’s good – and highly profitable – to be a Chinese online-commerce specialist, especially if you’re called Alibaba Group.
Alibaba earned $3.06 billion in fourth-quarter revenue, up 66.3 percent from $1.84 billion during the same period ended Dec. 31 a year earlier, according to Yahoo, which included the data with its company first quarter earnings on April 15 because of its 24 percent stake in Alibaba. Net income for Alibaba was $1.36 billion, up 109 percent from $650 million, Yahoo said.
Alibaba in March announced it would pursue a U.S. initial public offering some time this year. The company said in a released statement at the time that the move to an IPO would allow the company to pursue a more global agenda. A poll of Reuter analysts indicated Alibaba would file a $15 billion IPO that values the company at $100 billion. As such, it would represent the biggest tech IPO since Facebook’s.
In terms of the company’s fourth quarter performance, Alibaba’s revenue total was unexpectedly high. Way high. Chinese research company iResearch had predicted the company's Q4 2013 revenue would reach $2.6 billion, with more than half coming from ad business.
“In Alibaba’s advertising business, bidding advertising is the major revenue source, followed by brand advertising,” the firm said in a note. “Bidding advertising maintained a rise of over 60 percent in revenue in the past two years and made up 70 percent to 80 percent of advertising revenue. B2B business contributed 18.2 percent of revenue in 2013, which dropped continuously in the past two years.”
Yahoo owns 24 percent of Alibaba, and its stake in the company had been valued at $27 billion. It originally bought a 40 percent stake in 2005, and it recently sold about half of that back to the company for $6.3 billion in cash and $800 million in preferred stock, plus $550 million for intellectual property.
Alibaba launched in 1999 as an online business-to-business (B2B) entity connecting Chinese manufacturers with overseas buyers. In 2007, the company listed on the Hong Kong exchange.
For investors, the value of Yahoo stock may rise leading up to the IPO as speculators seek to take advantage of Alibaba’s performance. It’s what happens to Yahoo’s stock afterward that has investors in Yahoo concerned.
"Beyond the valuation that Alibaba will actually realize, big questions remain on how Yahoo will minimize its tax bill on capital gains when a partial disposition occurs at the time of the IPO," Brian Wieser, a senior research analyst at Pivotal Research, said in a research note. "Further, the company's preferences in terms of how it will actually use the capital it raises will come increasingly to the forefront as the year progresses."
Also of concern to financial analysts is Yahoo’s core-business search and display advertising growth, which are below industry norm. Yahoo paid $1.1 billion to buy Tumblr last year to help build up core revenue. It completed the acquisition in June 2013. Two months later, Tumblr partnered with Simply Measured to introduce enterprise-level analytics for marketers.
Yahoo reported first quarter display revenue ex-[traffic acquisition costs] of $409 million, a 2 percent increase from $402 million a year earlier. It also noted that the number of ads sold increased approximately 7 percent from a year earlier. Search revenue ex-TAC was $444 million, up 9 percent.
In the company’s earnings release, CEO Marissa Mayer lauded the quarter’s performance. “Buoyed by our ninth consecutive quarter of year-over-year growth in Search revenue ex-TAC and our first quarter of Q1 year-over-year growth in display revenue ex-TAC since 2011, Q1 was an early and important sign of growth in our core business,” Mayer said. “And, with mobile pivotal to our future growth, we’re delighted to now see more than 430 million monthly mobile users accessing Yahoo’s new products.”
Yahoo reportedly must sell half its remaining shares in Alibaba when it goes public, and Alibaba has not said how many shares it plans to sell and at what price. Alibaba represents $21 per share of Yahoo’s stock, which on April 15 was selling for around $34.21.
In March, Alibaba Group announced it would be launching a new U.S.-based eCommerce site, 11 Main. In a recent commentary, Market Platform Dynamics CEO Karen Webster wrote that Alibaba was well positioned to make a push into the international eCommerce scene. Read what she has to say on the matter by clicking here.
Alibaba in January said its Alipay online-payment affiliate, which accounts for about half of China’s online payment transactions, was teaming with Sina Corp. to launch a new online payments service. That move reportedly followed Alibaba's 2013 deal to acquire an 18% stake in Weibo from Sina for $586 million.
Yahoo on April 15 reported $1.14 billion in revenue for the quarter ended March 31, up 0.9 percent from $1.13 billion a year earlier. Net income was up 24.5 percent, to $390.9 million from $313. 9 million.
The performance beat analyst predictions. Thomson Reuters speculated Yahoo would report revenue of $1.08 billion for the quarter. Yahoo’s management had predicted between $1.12 billion and $1.16 billion in Q1 revenue.