This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Biggest Risks to Alibaba's IPO

Updated from 5:36 P.M. to include Softbank ownership structure and board seat.

NEW YORK (TheStreet) -- It's finally here, the F-1 filing for Alibaba, China's largest Internet company, as the company gets set to go public later this year in the U.S. However, given the unique structure of the company, there are plenty of risks to go along with it.

According to the company's F-1 filing, Alibaba had 231 million unique users at the end of 2013, with 136 million mobile monthly active users (MAUs), who helped generated $248 billion in gross merchandize volume for the year. Perhaps one of the biggest risks the company faces is its reliance on Alipay, which has been compared to the PayPal of China.


WATCH: More market update videos on TheStreet TV | More videos from Ruben Ramirez

Alibaba earned $3 billion in profit in the nine months ended on Dec. 31, 2013, and revenue of $5.6 billion. Earnings at Chinese e-commerce giant Alibaba more than doubled in the fourth quarter to over $1.3 billion as revenue topped $3 billion, Yahoo! (YHOO), which owns nearly a quarter of Alibaba, said in its first-quarter earnings slides.

In mid November, Alibaba said it generated $5.7 billion in sales from this year's Singles Day, including $877 million in mobile transactions. For Alibaba, strong revenue growth and rising profit margins in 2013 mark a busy twelve months.

"In the twelve months ended December 31, 2013, 78.6% of GMV on our China retail marketplaces was settled through Alipay, and the settlement and escrow services and convenient payment mechanisms provided by Alipay are a critical factor contributing to our success and the development of our ecosystem," Alibaba said in the filing. "Pursuant to our agreement with Alipay, Alipay provides payment services to us on terms preferential to us. See "Related Party Transactions - Agreements and Transactions Related to Small and Micro Financial Services Company and its Subsidiaries."

There have been reports that Alibaba, which is 24% owned by Yahoo! (YHOO), will try to buy back the portion of Alipay it does not already own, though that is still anything but a foregone conclusion. Given that Alipay's business is highly regulated in China, Alibaba could suffer any of the following outcomes with its payments processor and escrow servicing partner, which could negatively impact sales.

      *increased regulatory focus and the requirement to comply with numerous complex and evolving laws, rules and regulations;

      * increasing costs to Alipay, including fees charged by banks to process funds through Alipay, which would also increase our cost of revenues;
 
      * dissatisfaction with Alipay's services or lower use of Alipay by consumers and merchants;
 
      * changes to rules or practices applicable to payment card systems that link to Alipay;
 
      * leakage of customers' personal information and concerns over the use and security of any collected information;
 
      * system failures or failure to effectively scale the system to handle large and growing transaction volumes;
 
      * failure to manage funds accurately or loss of funds, whether due to employee fraud, security breaches, technical errors or otherwise; and
 
      * failure to manage business and regulatory risks.

In March of this year, it was reported that the People's Bank of China had more regulations regarding online and mobile payment services, which would prohibit individuals from using "the funds in their online and mobile payment accounts with third-party payment providers such as Alipay to make purchases in excess of RMB 5,000 (US $804) in any single transaction or over RMB 10,000 (US $1,609) in aggregate purchases per month." In addition, the regulations would limit transfers to other accounts to RMB 1,000 (US $161) per transaction and RMB 10,000 (US $1,609) per year.

Aside from the problems stemming from its reliance on AliPay, Alibaba primarily gets its revenue from online marketing services, commissions based on transaction value, and fees from the sale of memberships on its wholesale marketplaces. Revenue grew 72.4% from fiscal 2012 to fiscal 2013, and 56.6% for the nine months ended Dec. 31, 2012 to the nine months ended Dec. 31, 2013. 

Like other global e-commerce retailers such as eBay (EBAY), which owns the aforementioned PayPal, and Amazon (AMZN), Alibaba is subject to the whims of the global economy, particularly a strong and burgeoning Chinese middle class.

Given Alibaba's exceptionally strong position in global e-commerce, the company has been fraught with claims of allowing sellers to sell pirated, or counterfeit goods. The company, founded by Jack Ma, has worked hard to stop that, but it's still a major risk for a company based in a country where intellectual property laws are murky, at best.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,563.30 -317.06 -1.88%
S&P 500 1,930.67 -39.40 -2.00%
NASDAQ 4,369.7730 -93.1290 -2.09%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs