Investments

Sizzle Or Fizzle: The Ant Financial IPO?

Unicorns are one thing. Unicorns on steroids are quite another.

As is well known by now, Ant Financial, the Chinese micro-lending Internet player, has raised a whopping $4.5 billion in its latest financing round, a tidy sum above the $3.5 billion it had initially been seeking.  The funding is a striking portrait of demand by investors with dry powder to gain entry into a nascent, technology driven market.

But is this a sizzle or fizzle – even though an IPO may be as much as a year off, according to some reports

It could very well be lining up to be a Fizzle.

Sounds counterintuitive, doesn’t it?

The headlines breathlessly exclaim that this is the largest funding round for an Internet company in history.

Jack Ma has scored a personal coup of sorts by becoming the richest man in Asia. 

And Alibaba gets the boon of having a finance arm that now has an implied valuation of $60 billion. 

Heady stuff for all involved.

To be sure, the fact that Ant Financial owns Alipay is a strong selling point, in the eventuality that the IPO happens.  Alipay is a launching pad for all sorts of seachange in Asia, as the company has hundreds of millions of users in China, who use the service to complete about 100 million transactions daily. 

But one huge sticking point should stand out. 

The biggest caution is the fact that among the biggest backers of the company, in this round, are state-run funds, which include China Investment Corp., a sovereign wealth fund, and China Construction BankCorp., and a year ago, Ant had raised $2 billion from China’s National Social Security Fund.

The backing of state entities is a double-edged sword. 

On the one hand, the government is a backstop.  On the other hand, the government is a backstop. 

The positive for Ant Financial is that should the company need a cash infusion, or should the economic shoals become too rocky to navigate (remember, China’s growth is slowing), there could possibly be a bailout. 

But there are such things as natural market forces, and price discovery that comes in tandem.  The natural cadence of buyers and sellers agreeing, in real time, on a stock price is never a smooth process. 

When the government gets involved, the process becomes even less smooth.  The interventionist approach this past summer where money got pumped into the markets was a salve, but only briefly. 

In a country where hundreds of billions of dollars are being devoted to tech startups, and a couple of trillions of dollars are being earmarked for venture cap, one wonders if there is hesitancy to spend currency on “real” projects that may be left wanting (Lord knows there’s no need for a slew of empty buildings to join the pantheon of empty buildings there). 

Throwing money at growth for growth’s sake leads to sky high valuations. 

But sky high valuations led to euphoria, and then despair, eventually.

Sizzle or Fizzle?

“Sizzle or Fizzle?” is concept that we started kicking around a year ago when covering the challenges of starting, running and competing with matchmaker businesses – those multi-sided platforms that only add value if they manage to get different groups of customers on board and engage them by removing a friction or solving a big problem.

And do that at scale.

These are the businesses that look simple but are the hardest businesses to operate. You all know them. Maybe you work for one, have founded one, might like to be one, partner with one or more of them, compete with one, or have ambitions to displace one.

If so, then you know that even the most successful matchmakers face headwinds – as we document every day on PYMNTS – and far more fizzle than sizzle.

Each week, we’ll comment on the “sizzles and fizzles” that week based on the comings and goings and happenings or not of these matchmaker businesses. We’ll also dive into one company or concept, and give you our view on its sizzle or fizzle potential.

This week’s “Sizzle/Fizzle” edition is driven by earnings season, and one potentially blockbuster IPO – Ant Financial.

Feel free to weigh in. We’d love your feedback!

 

The Week’s Sizzles and Fizzles | April 29 Edition

Sizzle

Facebook
Its Q1 earnings make one thing very clear: Facebook is crushing it on the advertising revenue side and in particular, on mobile. You all thought that when Facebook launched it was a platform that was just about bringing friends together, didn’t you? Turns out that it’s really a massive advertising platform that matches advertisers who want to reach the 1.6 billion people who show up every month to check on their friends in between the ads in those newsfeeds.

PayPal
PayPal CEO, Dan Schulman told analysts yesterday that this quarterly earnings report was “PayPal’s best quarter ever” since he took the reins 19 or so months ago. PayPal is 17 million users away from breaking 200 million (it reported 184 million), has 21 million One Touch users in 144 countries, and has increased engagement on the part of those users to 28 times a month, more than double what it was two years ago. Venmo is also setting the place on fire, with transaction volume increasing 154 percent from last quarter to $3.2 billion.

Amazon

A CNBC reporter confessed to thinking that when she initially saw the ticker about Amazon’s EPS of $1.07, she thought that it was a typo. Analysts had Amazon pegged at roughly $.58 a share on revenues of roughly $28 billion. Amazon reported revenues of $29 billion.

The company whose reputation is more or less pegged to not making a profit has now also gone 4 straight quarters making one.

Sales all around the world beat forecasts – in the U.S. by 27 percent year over year and international markets by 24 percent – fueled by a big spike in international Prime members, according to Amazon’s CFO.

With roughly $6.5 billion in free cash flow over a rolling 12-month period, Amazon has a tidy war chest built to fund more original content for its streaming service (something it says is a big priority), turbo-charge its Alexa ecosystem (something that CEO Jeff Bezos said is fueling demand for Echo devices that they can barely keep in stock) and do some creative things with Pay with Amazon (as we have already begun to see with its deal with Moda Operandi two weeks ago).

Fizzle

Alt lending
The degree to which alt lending will fizzle is – or will soon be – in the hands of the CFPB. Hints about their positions on payday lending are expected next Thursday (May 5). It’s not as if anyone wants alternative lending products to be predatory or consumer-harming but, in the case of payday lending, it would be a shame if their rules were based on the assumption that all payday lenders are bad actors and all payday borrowers are being exploited.

Reports yesterday (April 28) suggest that the CFPB will soon preside over online marketplace lending. At least for now, it seems that the only people being harmed by the marketplaces that give out unsecured loans to people are the investors who risk having their investment portfolios blow up. That could destabilize these platforms, and deny access to consumers, but depending on how the CFPB decides to regulate them, that could likely happen anyway.

Twitter
“Oh, where o’ where has my revenue gone,” sang investors this week. (Hint: See Facebook, who now boasts 3 million of them). Twitter’s user base increased, but not enough to plug a hole in the advertising revenue shortfall that drove its stock price down 13 percent on Tuesday. Twitter’s user base grew to 310 million monthly active users, but revenue missed big time. Analysts were expecting $677 million and change and Twitter came in well below that. Twitter CEO Jack Dorsey, whose other full-time gig is running Square, says that they have a few tricks up their sleeves to get advertisers back in the saddle.

Apple
Yikes. The most valuable company in the world shed $40 billion in market cap this week as analysts reacted badly to the news that Apple sales declined for the first time since 2003.

CEO, Tim Cook, acknowledged the challenging quarter, and blamed macroeconomic conditions, in part, for the drop in revenues and profits. Cook suggested that some of the softness is the result of some of the strengths that were seen in the early days of the iPhone 6 release – over the top sales then cannibalized sales later on.

The big takeaway, however, is that consumers are holding onto smartphones longer, and perhaps likely why Apple recently made its upgrade/installment plan a feature on its web store (instead of only at retail outlets) to try to add a little carrot to those who need one to put one into their cart. China is also a trouble spot for Apple, something that spooked Carl Icahn, who announced that he is selling his position in Apple given his concerns over their reliance on sales in China to continue to drive results. Apple is facing a slowing economy and stiff competition there—and whatever the Chinese Communist Party might have in store for it (like shutting down iTunes and iBooks).

Shuddle
What could be more appropriate than rounding out this week’s edition than the shuttering of one of the latest examples of an “Uber of Nothing” biting the dust? Shuddle, the Uber for Kids, officially ran out of money and is shutting down. The service that was designed to cart kids around with kid-friendly drivers apparently didn’t have enough kids (or parents to pay for those kids) to keep drivers busy and Shuddle’s gas tank filled. What’s amazing is that they got $14.1 million from a variety of VCs to get it off the ground just a year ago. Even more amazing is that Zum, a competing service, was able to secure funding for a similar service in LA and is reported to have signed up 100 drivers.

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