MONEY Airlines

How Virgin America Plans to Take the U.S. Airline Industry by Storm

Virgin America Inc. President and Chief Executive Officer David Cush (C) celebrates the company's initial public offering after ringing the opening bell of the trading session with NASDAQ President and Chief Executive Officer Robert Greifeld (2nd R) at the NASDAQ Market Site in New York, November 14, 2014.
Mike Segar—Reuters

Keep unit revenues high and unit costs low—even if that means no flat-bed seats.

Virgin America VIRGIN AMERICA INC VA -0.5592% made its public trading debut last Friday. Its first few days as a public company have been incredibly successful — at least from the perspective of early investors. The Virgin America IPO priced at $23 (above the midpoint of the projected $21-$24 range). In its first three days of trading, the stock soared more than 60% to close at $37.05 on Tuesday.

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On the day of Virgin America’s IPO, I spoke with CEO David Cush and CFO Peter Hunt about the company’s strategy for growth and margin expansion. Here’s how Virgin America plans to take the U.S. airline industry by storm.

High unit revenue and low costs

To hear Cush talk about it, Virgin America’s formula for long-term success is extremely simple: keep unit revenues high and unit costs low.

Well, I think the key thing is understanding our model. Our model is we do have a premium product, we do generate a revenue premium to most of the industry, but we do it with a low-cost model.

So we have a very pure low-cost model. We are single fleet type; we are point-to-point. That was really the original playbook for the low-cost model. So: high revenue, low cost, and I think we’re seeing it on the bottom line now that the network has matured.

–Virgin America CEO David Cush

Of course, having high revenues and low costs is what every CEO wants. Virgin America is making progress toward this goal. In the 2 years leading up to Virgin America’s IPO, the company dramatically boosted its profitability.

Through the first 9 months of 2014, the company reported operating income of $86.3 million, representing an operating margin of 7.7%. By contrast, in the first 9 months of 2012, Virgin America posted an operating loss of $36.8 million for a -3.7% operating margin.

That said, among the top 10 U.S. airlines, Virgin America had the second lowest operating margin (excluding special items) for the 12-month period ending in September. Virgin America has solid margin growth momentum, but it still has plenty of work to do.

Plans to earn a revenue premium

Let’s take a look at the revenue side first. Virgin America plans to boost its unit revenue by continuing to offer a superior on-board product, including leather seats, a first-class section on every flight, Wi-Fi on every plane, mood lighting, etc.

In addition, Virgin America will focus its growth on high traffic routes in its top markets. “We’re not a big connect-the-dot carrier,” says Cush. “We like to focus on where we’re strong.” This really means San Francisco and Los Angeles: more than 95% of its capacity touches one of these two cities.

In other words, the seasonal routes from New York to Fort Lauderdale and from Boston to Las Vegas that Virgin America announced last month will be the exception, not the rule.

Virgin America has strong roots in San Francisco and Los Angeles. Moreover, these are two of the top business markets in the U.S. Both factors make it easier to attract corporate travel accounts there. On average, corporate travelers pay 50% more than other customers for Virgin America tickets. Thus, the carrier has a strong incentive to expand in those two cities.

The one promising market that Virgin America sees aside from San Francisco and Los Angeles is Dallas. Earlier this year, Virgin America snagged two gates at Love Field, a small airport that is much closer to downtown Dallas than the significantly larger Dallas-Fort Worth International Airport.

Love Field is a unique expansion opportunity. Nearly all of its gates are controlled by Southwest Airlines, a carrier that doesn’t offer many of Virgin America’s amenities (like first-class seats and personal TVs). As a result, Virgin America thinks it can attract corporate travelers who want those amenities but also value Love Field’s convenience.

Virgin America began flying from Love Field a month before the IPO. According to Cush, financial results for its flights to San Francisco and Los Angeles (which had previously used DFW) have been better at Love Field from day one.

Virgin America’s has also seen plenty of demand in its new markets from Dallas: New York City and Washington, D.C. This should lead to excellent financial results once these routes have a few years to mature, due to the capacity-constrained nature of all 3 airports.

Cost containment plans

Virgin America also has to keep its costs in line to produce outsize profits. Like most young carriers, Virgin America currently benefits from comparatively low labor costs. Its young fleet is also easy to maintain. However, as the company’s workforce and fleet age, both will be sources of cost pressure. (Unionization of its workers is another potential cost driver.)

Another challenge Virgin America faces is its refusal to mimic competitors by cramming rows closer together to fit more passengers on each plane. How can Virgin America mitigate or offset these cost headwinds?

One thing that both CEO David Cush and CFO Peter Hunt emphasized in our conversation was Virgin America’s “simple production model.” By maintaining a single fleet type and outsourcing more tasks than other airlines, Virgin America avoids complexity and keeps costs down.

Virgin America’s IPO will improve the company’s access to capital, according to CFO Peter Hunt. This will allow it to reduce its aircraft financing costs. For example, rather than leasing planes, it could take advantage of the low interest rate environment to issue cheap debt and buy the planes outright.

Virgin America also keeps costs down by not using flat-bed seats in first class on the lucrative transcontinental routes from JFK Airport in New York City to San Francisco and Los Angeles, where it deploys a lot of its capacity. This puts it at odds with the other 4 carriers serving those routes.

Flat-bed seats are an “overrated feature unless you’re on a red-eye,” David Cush recently told Bloomberg. Most transcontinental flights are not red-eyes. Virgin America doesn’t operate any red-eye flights going westbound, and it operates one daily red-eye on each of the San Francisco-JFK and Los Angeles-JFK routes.

Flat-bed seats take up lots of space, increasing unit costs. Most of Virgin America’s planes are A320s configured with 146 or 149 seats. By contrast, American Airlines recently began flying the A321 on its transcontinental routes. The A321 is a bigger airplane, yet American Airlines has configured these planes with just 102 seats (of which 30 are flat-bed seats).

Thus, for transcontinental flights, Virgin America operates with a denser configuration than its competitors (which is the reverse of the situation on most of its routes). If Cush is right and very few people care about having a flat-bed seat for their transcontinental flights, Virgin America will be able to generate plenty of revenue on those flights while having the lowest unit costs.

Time to get to work

Virgin America has plenty of work to do if it is to earn a revenue premium to the U.S. airline industry while maintaining low unit costs. In some areas, it has clear plans. Its recent buildup at Dallas Love Field should boost unit revenue. Virgin America’s IPO should reduce aircraft financing costs.

However, there are some big open questions. Is Virgin America right that flat-bed first-class seats aren’t necessary on transcontinental flights? Can Virgin America avoid the cost creep that has hurt various other low-cost carriers as they have aged? Only time will tell.

(Read the full interview with Virgin America CEO David Cush at The Motley Fool.)

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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TIME Companies

Grading Twitter’s Performance One Year After Its IPO

US-INTERNET-TWITTER
A banner with the logo of Twitter is set on the front of the New York Stock Exchange on November 7, 2013 in New York. Emmanuel Dunand—AFP/Getty Images

Twitter is generating big revenue and making smart acquisitions but slow user growth remains the dominant concern

Social networking giant Twitter was flying high a year ago, when its wildly successful IPO filled the company’s coffers and seemed poised to usher in a new wave of consumer tech public offerings.

But the company’s performance in 2014 has been mixed. New users are still coming to the site, but at a relatively slow rate. Revenue is growing briskly, but so are losses. And a revolving door in the executive suite means that the company’s leadership is in flux. As the Wall Street Journal points out in a profile of CEO Dick Costolo, exactly what Twitter is and what it wants to be seems to be ever shifting.

Here’s a recap of Twitter’s first year as a public company, grading its hits and misses.

User Growth

Over the last four quarters, Twitter has added 52 million monthly active users, growing its userbase by about 22%. In the year prior, Twitter added 65 million new users and grew its base by about 39%. This decelerating growth has been the main narrative dogging Twitter during 2014 and drawn unwanted comparisons to Facebook, which is still growing at a healthy clip despite dwarfing Twitter in size. Costolo has tried to divert attention toward other Twitter growth metrics, like the number of people who see tweets embedded across the Web, but investors continue to be fixated on user numbers. On this front, Twitter looks like a maturing company, not a quickly growing one, which is a huge problem given its stated ambition of “building the largest daily audience in the world.”

Grade: C

Stock Performance

Twitter roared out of the gate as a public company, jumping more than 70 percent from its IPO price of $26 per share during the first day of trading. Since then it’s been a rocky ride—the stock climbed above $70 amid a larger market rally at the end of 2013, then dove as low as $30 during the spring. Because investors (and perhaps the company itself) have yet to settle on exactly which metrics should be used to measure success, every quarterly earnings report from the company feels like a gamble. On Thursday, Twitter closed at $40.84. That’s well above the IPO price but perhaps not at the heights early investors dreamt were possible.

Grade: B

New Features

Everyone from tech pundits to Costolo himself have acknowledged that Twitter’s main failing is that it can be hard for new users to understand. The company’s made some cosmetic efforts to address this issue, by helping new users find interesting people to follow and revamping profile pages to make them more visually engaging. However, the core functionality of Twitter as an unending torrent of short messages filled with cryptic, site-specific shorthand remains unchanged. Twitter could make more changes to its core product to make it palatable to a wider audience—by presenting tweets based on an algorithm instead of chronological order, for instance—but such a move risks alienating the power users that provide so much of Twitter’s content.

Grade: C

Financial Performance

Twitter was famously unprofitable when it went public. The company now generates a small profit excluding some line items like stock-based compensation. But investors didn’t expect the company to make money in 2014 and its adjusted earnings have consistently exceeded Wall Street’s expectations. Revenue is also increasing at brisk pace, more than doubling to $361 million in the most recent quarter. The company also managed to increase the average revenue generated per 1,000 timeline views in each successive quarter this year. All in all, Twitter’s doing a good job monetizing its current userbase. The problem is that it hasn’t reached a level of scale that would allow it reach the revenue or profit levels of the biggest Internet companies.

Grade: B

Leadership

From its inception, Twitter has had a tumultuous executive suite, but the hirings and firings have come at a torrid pace since the company went public. In the last year Twitter dumped its chief operating officer, its chief financial officer, its product chief, its vice president of media and its head of news. This ongoing shakeup has not yet led to a significant boost in user growth or a meaningful rethinking of the Twitter product. Instead it’s created confusion about the company’s direction.

Grade: D

Events

Twitter has always shined most during big events, and the company worked hard this year to make the site an even more essential event destination. The biggest push came for the World Cup, when Twitter made a landing page full of curated tweets and live scores. Other big events included the Super Bowl (most tweeted ever), the Grammys and made-for-social TV programming like the ridiculous Sharknado movie. There was also Ellen Degeneres’ celebrity-studded Oscar selfie, which was retweeted more than 3.3 million times and generated gobs of free press for Twitter. The social network has effectively made its users’ conversations a relevant facet of virtually every heavily covered news event, whether it’s the Ebola outbreak or #AlexFromTarget.

Grade: A

Acquisitions

All of Twitter’s big-time acquisitions still appear to be chocked full of potential. MoPub provides the basis for Twitter’s ad exchange and is front and center in the company’s new suite of developer tools to help app makers place ads in their programs. Twitter data licenser Gnip will help the company better monetize its firehose of tweets, which are a sought-after gauge of public sentiment for marketers and academics. And microvideo website Vine, which seemed like a curious oddity when first acquired in 2012, now racks up more than 1 billion video plays per day. Even if the growth of Twitter proper remains slow, the company can tap into other revenue sources.

Grade: B

 

TIME technology

Alibaba Founder Jack Ma’s Other Big Job

Alibaba Chairman Jack Ma
Jack Ma, chairman of Alibaba Group Holding Ltd., in Hong Kong on Sept. 15, 2014. Brent Lewin — Bloomberg / Getty Images

The Alibaba IPO will set a record, but the company's founder has focused on China's environmental problems

Friday’s Alibaba initial public offering will officially be the largest in U.S. history: the Chinese e-commerce giant is raising $21.8 billion with its stock debut.

But Alibaba’s billionaire co-founder Jack Ma — though a major presence on the IPO circuit and a major beneficiary of it, standing to gain hundreds of millions of dollars from the stock — isn’t just focusing on his company and its earnings. In fact, last May he stepped down from his position as CEO. (He’s still the company’s chairman.) He is, as Victor Luckerson spelled out earlier this year, not your typical tech honcho. Rather, he’s a former English teacher who doesn’t code and loves the soundtrack to The Lion King.

He’s also one of China’s most important environmentalists, as Bryan Walsh explained in a 2013 TIME profile of Ma:

But as entrepreneurs get older–Ma, 48, says he is “old for the Internet”–they start to slow down, look around. What Ma saw was a country paying an environmental price for rapid development. His father-in-law developed liver cancer, a disease Ma–and some scientists–connects to the terrible water pollution that is now common in much of China. Ma saw the skies in Beijing and other Chinese cities grow foul with pollution. On a trip to the countryside near his hometown of Hangzhou, he saw that a lake in which he had nearly drowned while swimming at age 13 now barely came up to his ankles. Farmers told him that they were so afraid of the poisoned soil, they wouldn’t eat some of their own produce. “I knew something was very wrong,” Ma told TIME during a recent interview in Santa Monica, Calif. “This is serious–and we have to make people pay attention to it.”

Now Ma is making it his mission to get China to pay attention to its environmental mess. On May 10, he stepped down as CEO of Alibaba, though he’ll retain a strategic role with the company. The next day he took a new job, as chairman of the China board for the Nature Conservancy (TNC), one of the richest environmental groups in the world. TNC has generally been U.S.-focused, but the sheer size and influence of China ensure that global environmental and climate issues will increasingly be decided there. If China is going to change for the greener, it will need local champions. Ma has volunteered.

Read Bryan Walsh’s full 2013 profile of Jack Ma here: From Gold to Green

MONEY stocks

Alibaba Raises $22 Billion in Record IPO

The Chinese e-commerce giant just raised a record amount of money on the New York Stock Exchange. Should you buy in?

TIME stocks

4 Things Alibaba’s IPO Tells Us About a Changing World Economy

An employee is seen behind a glass wall with the logo of Alibaba at the company's headquarters on the outskirts of Hangzhou, Zhejiang province
An employee is seen behind a glass wall at Alibaba's headquarters on the outskirts of Hangzhou, China, on April 23, 2014 Chance Chan—Reuters

The Chinese e-commerce giant launches one of the largest stock-market debuts in history — and points the way to our economic future

The story of Alibaba has already become legend. Fifteen years ago, Jack Ma, a former English teacher, and his co-founders set up their Internet company in an apartment in the Chinese city of Hangzhou, not far from Shanghai. Today, Alibaba’s online shopping sites in China — mainly Taobao and Tmall — handle twice as much merchandise as Amazon. The company’s initial public offering on the New York Stock Exchange will bring in a haul of some $21.8 billion — bigger than Facebook’s — and values Alibaba at $168 billion — four times more than Yahoo.

When Alibaba’s shares start trading Friday, history will be made. And not just in the world of tech or stock markets. Alibaba’s IPO represents some much bigger trends shaping the world economy. Here are four things the IPO tells us about our economic future:

1. More and more of the world’s most prominent companies will be from the developing world.
We still have this image of China as one big factory floor where millions of poor people slog away on assembly lines churning out cut-rate toys, clothes and electronics. Sure, there are still factories like that, but ever more that low-cost manufacturing center guise is becoming the Old China. The world’s most populous nation is developing so rapidly that it is already producing companies that are major players in all sorts of industries. Lenovo is now the largest PC maker in the world, while Huawei is challenging the best of the West in telecom equipment.

Alibaba takes this trend to an entirely new level — out of manufacturing and into the realm of technology and services. Ma and his executive team have created a company that can be named in the same sentence as tech titans like Facebook and eBay. And Alibaba is not unique. Shenzhen-based Tencent, which operates the popular WeChat messaging service, is yet another Chinese Internet firm with global potential. The fact is the most powerful companies in the U.S. and Europe will increasingly have to contend with Chinese companies exploding onto the world stage. And China may be in the lead among the world’s emerging economies in this trend, but it is not alone. India has produced some IT firms that can compete with the world’s best, such as TCS and Infosys.

2. Emerging markets are creating blue chips.
Ever since the idea of investing in the developing world became popular in the early 1990s, there has been a line drawn between these “emerging markets” and the more established bourses of the U.S., Europe and Japan. Emerging markets were supposed to be riskier, where only the bolder of investors would dare tread, compared with the supposedly more trustworthy and less volatile options in New York City and London. The Alibaba IPO shows how that great wall is breaking down. That a company based in a town like Hangzhou can raise more money in its IPO than one based in Menlo Park, Calif., (Facebook) shows that investors are starting to treat firms from the developing world on par with those in the developed world. Of course, the stigma staining companies from China and elsewhere won’t go away overnight — Chinese companies that have listed in New York City have had a sad history of accounting disasters. But going forward, your stock portfolio is going to hold more companies with addresses in Shanghai, Mumbai, Istanbul and São Paulo.

3. Consumers in the developing world will rule the world.
The story of the global economy since the end of World War II has gone something like this: capitalizing on better transport and communications technology, world production shifted en masse to poor countries from rich countries like the U.S. Factories replaced rice paddies in South Korea, China, Indonesia and elsewhere, which then shipped the mobile phones, computers and sneakers manufactured there to store shelves in the U.S. and Europe. The billions of people in these poorer nations couldn’t afford much of the stuff they made.

Now the global economy is “rebalancing.” Consumption in the U.S. and Europe is constrained by weaker job prospects and stagnant wages, while disposable income in China and other developing nations is increasing in leaps and bounds. That is making consumers in these countries the new engine of global economic growth. If the U.S. consumer dominated the 20th century, the Chinese and Indian consumer will control the 21st.

Alibaba is a prime example of the power of these new, emerging consumers. In 2013, Chinese shoppers bought $248 billion of stuff on Alibaba’s retailing websites. Compare that to an estimated $110 billion worth of good purchased on Amazon — globally. Increasingly, it will be companies that sell to households in Beijing, New Delhi and Jakarta that will dominate global consumer industries.

4. Your next job may be at a Chinese or Indian company.
Jack Ma has said that he plans to use some of his multibillion haul from the IPO to expand Alibaba’s presence in the U.S. and Europe. This, too, is part of a trend. Companies from developing markets are becoming more important investors around the world. According to the American Enterprise Institute, Chinese companies have invested more than $500 billion around the world since 2005 — with the U.S. the top destination.

And as companies from China, India and other emerging economies become ever bigger and bigger global investors, they will become bigger and bigger global employers. Firms like Lenovo, Huawei, carmakers Geely and Tata, appliance maker Haier and a host of others already employ thousands between them around the world. Going forward, you might just find your best job opportunity is at a company like Alibaba, based in China, rather than a firm in New York City, Paris or Frankfurt.

MONEY tech stocks

5 Winners and 5 Losers of the Alibaba IPO

Alibaba founder Jack Ma
Alibaba founder Jack Ma gives a thumbs-up as he arrives to speak to investors at an initial public offering roadshow in Singapore September 16, 2014. Edgar Su—Reuters

Both lists include some surprising players who will be directly or indirectly affected by the e-commerce giant's record stock offering.

Depending on how things go on Friday, when Alibaba starts trading on the New York Stock Exchange, there could be tens of thousands of winners from what’s expected to be a record initial public offering.

But as with all things in life, there are winners and then there are winners. Here’s a rundown of who those really big winners are apt to be, along with some potential losers.

The Winners

1) Jack Ma, Alibaba founder and CEO

This former school teacher turned Internet mogul doesn’t need Alibaba’s IPO to go gangbusters. He is already the richest man in China, worth approximately $22 billion, according to Bloomberg. For Ma, who personally owns around 9% of Alibaba shares, any boost in the stock’s estimated value post-IPO will simply be icing on the cake.

Ma’s real victory comes in the retention of power. Because the Chinese government forbids foreign ownership of key strategic assets in China, this IPO is structured in an unconventional way. As MONEY points out in “No, Alibaba is Not the Next Facebook (and 4 Other Myths About this Mega-IPO Debunked,” investors who buy the stock don’t technically get to own the company. Ma and a group of Chinese citizens who founded and help run Alibaba are still the technical owners of the company’s assets.

Rather, investors simply get the rights to the profits that are sent to a holding company known as a “variable interest entity,” which is based in the Cayman Islands.

The upshot is, Ma gets to raise $25 billion in capital by going public, yet he is not beholden to his shareholders in the same way other publicly traded companies are. In other words, Ma gets his money without having to give up any power. That’s like winning the lotto.

2) Masayoshi Son, founder and CEO of Softbank

Son, who runs the Japanese tech and telecom giant Softbank, is now the richest man in Japan, worth nearly $20 billion, according to Forbes. For that, he can thank one of the greatest investment decisions in modern history.

In 2000, at the height of the tech bubble, Son invested $20 million in a Chinese startup and encouraged its founder, Jack Ma, to hang on during tough times.

That proved to be beyond smart. Son’s $20 million turned into around $55 billion in less than a decade and a half, which is another reason why Son is sometimes referred to as the “Bill Gates of Japan.” This is sweet redemption for an Internet visionary who reportedly lost upwards of $70 billion in wealth when the tech bubble burst in 2000.

3) Softbank and Sprint

Much has been written about how Yahoo owns around one fifth of Alibaba’s shares. Well, Masayoshi Son’s Softbank — the Japanese tech, telecom and Internet giant — owns more than a third of the e-commerce giant.

For Softbank, owning Alibaba will help it attract global investors who want an indirect — and more diversified — way to gain exposure to the Chinese company. In addition to its large stake in Alibaba, Softbank is a major player in the Japanese mobile phone market; has its hands in hundreds of tech and media companies throughout the world; and owns a 70% stake in Sprint.

Now Softbank will have a pile of cash to make strategic acquisitions to strengthen Sprint, which for years has lagged its larger competitors Verizon and AT&T. At the very least, Softbank can invest some if its Alibaba winnings in Sprint by improving its infrastructure.

4) Snapchat

After its IPO, Alibaba will have $25 billion burning a hole in its pocket. Already, Wall Street and Silicon Valley are drawing up a list of potential takeover and investment targets.

High up on that list is Snapchat. Yes, talks between the two companies — which would have had Alibaba take a minority stake in the messaging app business — ended more than a month ago.

But that may have been because of the noise surrounding Alibaba’s IPO, and the fact that Snapchat raised around $20 million in funding through another means: via the venture capital firm Kleiner Perkins Caufield & Byers. Forbes reports, though, that this represents just 3% to 5% of the company, whose overall value is said to be around $10 billion. So there’s plenty of opportunity for Alibaba to get a piece of the pie.

Alibaba isn’t the only deep-pocketed suitor reportedly interested in Snapchat. The company has already turned down an offer from Facebook, and there are rumors that Microsoft, which has developed a similar app to Snapchat called Windup, is also interested in buying the firm. Surely, having Alibaba circling this pond will only drive Snapchat’s price higher.

5) ShopRunner

Alibaba has made a lot of small investments in U.S. companies, ranging from the app search engine Quixey to the messaging service Tango to the transportation app Lyft. But its $200 million investment in the online shopping site ShopRunner is the most intriguing because of how Alibaba may leverage it down the road.

Alibaba now owns 39% of the online service, which is aiming its sights on Amazon.com. Think of ShopRunner as a virtual mall, in which small storefronts of well-known retailers like Brooks Brothers, Neiman Marcus, and Eastern Mountain Sports can be found. As with Amazon Prime, ShopRunner charges a flat fee (in this case, $79 annually) in exchange for free 2-day shipping on purchases made throughout the year. Quartz points out that the model is similar to Alibaba’s Tmall, where the company gets a small cut for every item sold on top of the annual subscription fee.

While ShopRunner pales in comparison to Amazon right now, that could change if Alibaba decides to throw its full weight behind this service and uses this franchise as its American version of Tmall.

The Losers:

1) Yahoo

It sure seems odd to describe a company that owns around a fifth of one of the most valuable businesses in the world — a stake that’s worth about $35 billion — a loser.

But here’s the deal: Yahoo, by agreement, must sell around 27% of its stake in Alibaba at the IPO. And as it sells its stake, Yahoo shares will begin to lose the one thing that has wooed investors so far this year: that Alibaba mystique.

Soon after, pressure will grow on Yahoo CEO Marissa Mayer to use the proceeds of the Alibaba investment wisely, for future acquisitions. But Yahoo doesn’t exactly have a great track record with companies purchased. Remember its $1 billion acquisition of Tumblr? As the New York Times recently pointed out, “Yahoo’s chief executive, Marissa Mayer, will find out how investors value the businesses she actually runs.”

2) Tencent

Tencent Holdings is a Chinese Internet company that competes head to head with Alibaba in a variety of businesses, ranging from online advertising to e-payments. Up until now, Tencent has been the largest Chinese internet stock, with a market value of around $150 billion. That will all change after Friday, when Tencent will drop to No. 2.

Moreover, in the run-up to Alibaba’s IPO, Tencent and other Chinese stocks have gotten short shrift as investors have fixated on Alibaba. See the chart below:

TCEHY Chart

TCEHY data by YCharts

3) Uber

What threat does a giant online retailer like Alibaba pose to a mobile ride-sharing service? Well, in the U.S., Alibaba recently joined a group that invested $250 million in Uber’s rival Lyft. Meanwhile, in China Alibaba is taking on Uber by backing the taxi-booking service Kuaidi Technology.

As Fortune recently pointed out, Kuaidi has gone from zero to 100 million users and 1 million drivers in two years.

4) The Nasdaq

The Nasdaq is synonymous with hot tech stocks, such as Facebook and Google. But when Facebook went public two years ago, things did not go smoothly. Trading started about half an hour later than expected, traders complained of missed orders, and there were questions if investors were getting the prices they expected. Nasdaq officials admitted that they were embarrassed by the glitches.

It came as no surprise, then, that Alibaba chose to list on the NYSE over the Nasdaq. According to Reuters, “Alibaba executives worried about Nasdaq’s ability to handle their $21 billion initial public offering later this month, since the exchange botched Facebook’s market debut two years ago.”

5) Baidu

Baidu, which runs the biggest search engine in China, has been among the most popular Chinese stocks held by U.S. investors. In fact, a ranking of stocks held by hedge funds this year showed Baidu as the top Chinese entrant, according to Business Insider. What’s more, Baidu was ranked as the most widely held American Depository Receipt (a type of foreign equity holding listed on American stock exchanges) last year.

That’s likely to change as Alibaba is an even bigger Chinese tech play, and it’s considerably more diverse in its holdings than Baidu.

MONEY

IPO Frenzy: Alibaba vs. Facebook

Chinese Internet sensation Alibaba Group Holding Ltd. is set to sell its first shares on Friday, making it the highest profile IPO since Facebook in 2012. Here's how these two online giants compare.

MONEY tech stocks

No, Alibaba Is Not the Next Facebook (and 4 Other Myths About This Mega-IPO Debunked)

An employee is seen behind a glass wall with the logo of Alibaba at the company's headquarters on the outskirts of Hangzhou, Zhejiang
Chance Chan—Reuters

A reality check on this e-commerce giant, in advance of the Chinese tech stock's much anticipated initial public offering.

Everything about Alibaba, the Chinese e-commerce giant, seems larger than life.

Its initial public offering, slated for Sept. 19, is expected to be the biggest IPO in U.S. history, raising possibly $25 billion.

The company is also China’s largest retailer, not to mention the biggest e-commerce player in the world, dwarfing U.S. companies like eBay EBAY INC. EBAY 1.9945% and Amazon.com AMAZON.COM INC. AMZN -0.3848% . Indeed, in the media, Alibaba has been described as China’s eBay, Amazon, and Google all rolled into one. Wow.

Of course, whenever there’s a convergence of three of the market’s favorite topics — tech investing, Chinese stocks, and IPOs — hyperbole has a way of creeping in.

So here’s a realistic look at the biggest myths about Alibaba that will help you put the stock in perspective.

Myth #1: Alibaba will be the most important stock to hit the market since Facebook.

Reality: Alibaba’s IPO may be bigger than Facebook’s, but its shares will have far less impact on the broader market.

Even though Alibaba is going public on the New York Stock Exchange, it’s technically not an American company. And that means the stock is not eligible for inclusion in the S&P 500 index, says Howard Silverblatt, senior index analyst with S&P Indices.

That, in turn, means that funds that track the major U.S. indexes will not be allowed to buy the stock, so the shares will have far less impact on how the broad market performs.

Plus, Alibaba is likely to be more volatile than other big tech stocks, as it won’t be included in those index funds that are required to hold all the stocks in their respective benchmarks in good times and bad. As Kevin Landis, chairman and president of the Firsthand Funds recently told Reuters: “There is a pretty strong argument that index inclusion equals stability.”

Reuters points out that by choosing to list on the NYSE rather than the Nasdaq, Alibaba gave up the possibility of being included in another well-tracked index: the Nasdaq 100.

Myth #2: Alibaba is like Amazon, eBay, and Google all rolled into one.

Reality: Alibaba isn’t China’s only Amazon, eBay or Google.

If you just read the headlines, you’d think that Alibaba is like the Borg — an intimidating collective that methodically goes from market to market devouring everything in its path. Yet the truth of the matter is that Alibaba, despite its size, faces stiff competition even in its home market.

Take the Google GOOGLE INC. GOOGL 1.6132% comparison. Alibaba is often described as the Google of China not because it runs a search engine, but because it leverages its consumer website for online advertising revenue.

But you know who else does that? Baidu.com BAIDU INC. BIDU 3.5872% , which is the Google of China because it runs the leading search engine and uses it as a source of online ad revenues. Baidu is a $75 billion company that trades on the Nasdaq and can be found in some of the leading U.S. growth stock funds, such as T. Rowe Price Blue Chip Growth.

As for the Amazon comparisons, don’t forget that there is already an Amazon of China, which is listed on the Nasdaq: It’s called JD.com JD.COM INC ADS EA REPR 2 COM 'A' SHS JD 3.2766% , a $40 billion company that went public in the U.S. earlier this year. JD.com is a retailer that sells directly to consumers, but it also runs an online marketplace where other sellers can find consumers — much like Amazon as well as Alibaba’s Tmall.

Alibaba is actually closest in structure to eBay, as it runs a consumer-to-consumer online auction site in addition to an electronic payment service called Alipay that’s a lot like eBay’s Paypal.

Here too, though, there’s stiff competition. Tencent Holdings TENCENT HOLDINGS LTD. TCEHY 4.5356% , a Chinese Internet and media company, operates Tenpay. Baidu offers Baidu Wallet, and there there are scores of Chinese banks that are getting in on the e-pay game.

Myth #3: You will own the most important Chinese company through this IPO.

Reality: Actually, this IPO won’t give you any ownership stake in the company at all.

Alibaba’s offering is being portrayed as an opportunity to own the most important company in China. Technically, the shares you buy won’t give you any ownership stake in this company. That’s because the Chinese government restricts foreign ownership of key strategic assets.

To get around this, Chinese companies that list abroad have come up with a complex structure called a “variable interest entity.” In Alibaba’s case, the VIE is based in the Cayman Islands and is entitled to the profits that Alibaba in China generates.

This may sound like a distinction without a difference, but it can lead to major complications. For instance, even though many Chinese companies including Baidu have gone public using VIE’s, the Chinese government has not ruled on the full legality of such a structure, the New York Times has reported.

Plus, disputes over transparency are bound to rise as foreign owners have no say in the actual operation of the underlying company. In a famous case in 2011, Yahoo, a long-standing investor in Alibaba, got into a dispute with co-founders Jack Ma and Simon Xie, claiming that they had improperly moved the Alipay bill-paying unit out of the the part of Alibaba that Yahoo partially owned an interest in.

The dispute was eventually resolved, but because the shareholders of the company (in the 2011 case, Yahoo; but going forward the public) don’t actually own and control the underlying company that generates the profits, disputes like this are bound to arise.

Myth #4: CEO Jack Ma is the Jeff Bezos of China.

Reality: Jack Ma is more like Jack Welch than Jeff Bezos.

Because Alibaba is a big player in e-commerce like Amazon.com, founder and CEO Jack Ma is often compared with Amazon founder and CEO Jeff Bezos.

But while Bezos is a consummate disrupter who is leveraging technology to change the way we consume, Ma seems to have none of these types of ambitions. Instead, there’s a growing sense in management circles that Ma is simply like an old-school head of a conglomerate who just wants to dominate every business his company is involved in.

“Alibaba doesn’t look much like Facebook, Google, or even Amazon,” Walter Frick recently argued in the Harvard Business Review. “Instead, it operates more like GE.”

Frick went on to cite this passage from a 2010 Harvard Business School case study on Alibaba written by professor Julie Wulf:

By his own admission, Ma was a fan of Jack Welch, so it was only natural that his organization came to resemble that of GE in some regards. Just as Welch did not dictate an overall theme or strategy for GE, Ma preferred not to set one agenda from Alibaba’s corporate center, but rather to have each subsidiary set its own strategy. Much like Welch’s famed “#1 or #2” objective for each of these businesses, Alibaba’s governance inspired its subsidiaries to be the leaders of their respective industries. Ma explained, “Business unit presidents must have the freedom to do what is right for their business. I want business units to compete with each other…and focus on being the best in their businesses.

This would explain why the company is involved not just in online retail, but in wholesale supply, logistics, computer services, cloud computing, media, marketing, and finance.

Myth #5: Alibaba threatens U.S. tech and e-commerce companies.

Reality: Alibaba’s growth lies in China, not in the U.S. .

There’s a stat floating around that says Alibaba controls some 80% of all Chinese e-commerce. That makes it sound like Alibaba is done conquering its home market and is looking abroad because that’s the only way to grow.

In reality, Alibaba is a big player in what is still a developing marketplace in China for online sales. By sheer numbers, China is a huge market, but less than half its households are online, and consumer spending makes up only around a third of its economic activity (compared with two thirds in the U.S.).

So future growth will be attained by making sure that it continues to control a large swath of the Chinese market as more and more consumers get online and as consumer spending there becomes a bigger and bigger part of the country’s larger economy.

In the U.S., the company has launched small efforts, including its 11 Main marketplace. But as MONEY’s Kristen Bellstrom recently noted, “At least in its current form, 11 Main is no match for America’s current online retail kingpins.”

Just as U.S. firms ranging from Wal-Mart to Netflix have run into cultural difficulties and stiff competition abroad, Alibaba has to figure out the nuances of American consumers and tastes before it can even try to conquer this market.

More likely, Alibaba’s goal at this point is limited to attracting Western investors and — as Greg Besinger pointed out in the Wall Street Journal — establishing a foothold in the U.S. so it can start selling more American-made goods to its Chinese customers.

So American e-commerce companies should relax — at least for the moment.

MONEY Google

10 Ways Google Has Changed the World

Google Earth view
Google

It's been a decade since Google went public. Here are 10 ways the company has transformed the market—and our lives— since.

Back in 2004, investors weren’t entirely sure what to make of Google, and skeptics abounded. Fast-forward to today, when we can look back at how far the company has come, in ways that inspire both awe and concern. Below are 10 examples of its influence.

1. It has changed our language. Despite Microsoft’s best efforts, there’s a reason “Bing” never caught on as a verb, let alone as a beleaguered anthropomorphic meme. The phrase “to Google” is so popular that the company is actually worried about losing trademark rights if the term becomes generic, like “escalator” and “zipper,” which were once trademarked.

2. It has changed our brains. Recent research has confirmed suspicions that 24/7 access to (near) limitless information is not only bad for human discourse—it’s also making us worse at remembering things, regardless of whether we try. And even if we aren’t conscious of it, our brains are primed to think about the Internet as soon as we start trying to recall the answer to a tough trivia question. Essentially, Google has become our collective mental crutch.

3. It set the stage for Facebook and Twitter’s sky-high valuations. Yes, lofty valuations based on mere speculation were also common back in the dot-com fervor of the ’90s, says Ed Crotty, chief investment officer for Davidson Investment Advisors. But Google broke new ground by proving that even just the potential for a huge audience could pay off in a big way.

“In the early days, when people were thinking in terms of web portals, the barriers to entry didn’t seem high for search,” Crotty says. That meant Google’s competitive advantage wasn’t clear. But “the tipping point was when Google was able to scale up their audience enough to attract ad agencies, and then further improve their algorithms, since those get better with scale. That’s partly why you see tech companies now willing to forgo profits for a period of time in order to build an audience.” And also why investors are willing to throw money their way.

4. It has taken over our cell phones. Since the first Android phone was sold in 2008, Google’s mobile operating system has bulldozed the competition. Today it claims nearly 85% of market share, nearly doubling its hold over the last three years. Next stop, self-driving cars?

5. It has transformed the way we use e-mail. Gmail was invented a decade ago, before bottomless inboxes were a sine qua non. It’s hard even to remember those dark ages when storage space was sacred—and deleting emails was as tedious-but-necessary as flossing. Today our accounts serve as mausoleums, housing long-forgotten files, links, and even whole relationships. Google itself has touted alternative uses for Gmail, such as setting up a virtual time capsule for your newborn—though in practice accounts can’t be owned by anyone under 13. But even that last point is about to change.

6. It’s changed how we collaborate. Back in 2006, Google acquired the company behind an online word processor named Writely. With that bet, Google created a world where it’s taken for granted that people can collaborate on virtually any type of document, whether for work, play, or (literally) revolution.

7. It has allowed us to travel the globe from our desks. Yes, MapQuest was popular first. But Google Maps (and Earth) has become much more than a tool for measuring travel routes and times. Since Google Street View came onto the scene in 2007, it’s been possible to “visit” distant destinations, give friends a virtual tour of your hometown, plan ahead of trips, and waste even more time on the Internet. Of course, the more popular a tool, the more useful it is to those who’d like to spy on us.

8. It has influenced the news we read. Ranking high in Google search results is serious business and can have a profound effect on the success of companies, media outlets, and even politicians. When I just Googled “how SEO affects journalism,” this link was at the top of my search results. How is that significant? Well, for one, that story itself has been so successfully search engine optimized that it still tops the list despite being four years old.

But most importantly, many of the concerns raised in the piece have not gone away—such as the pressure to “file some pithy blog post about the hot topic of the moment” at the expense of covering stories that would be prioritized based on traditional measures of newsworthiness. What that means for you, the reader: more headlines like this and this.

9. It has turned users into commodities. We all love free stuff, but it’s easy to forget that services offered by companies like Google and Facebook aren’t truly “free,” as data expert Bruce Schneier has pointed out. Remember that all of your data (across ALL of the services you use, and that includes Calendar, Maps, and so on) is a valuable good that Google is packaging and selling to its real customers—advertisers.

10. It’s changed how everyone else sees YOU. Unlike your Facebook profile, the links that turn up when potential employers (or love interests) Google you can be near-impossible to erase. Perhaps unsurprisingly, Google uses the fear of embarrassing search results to encourage people to manage their image through Google+ profiles.

Related:
4 Crazy Google Ambitions
The 8 Worst Predictions About Google

TIME facebook

Here’s How Facebook Doubled Its IPO Price

Facebook Holds f8 Developers Conference
Facebook CEO Mark Zuckerberg delivers the opening kenote at the Facebook f8 conference on April 30, 2014 in San Francisco, California. Justin Sullivan—Getty Images

Facebook's stock doubled its IPO price by midday Thursday

Facebook suffered a cruel summer back in 2012. The social network raised its IPO price just before going public in May 2012, but technical glitches during early trading caused mass investor confusion. Nasdaq eventually paid a $10 million fine over the debacle, and Wall Street showed no mercy to the social network in the ensuing months. Facebook’s stock cratered, diving from $38 to below $18 before the following autumn.

Two years later, the sun’s shining bright on the tech giant. Facebook beat analysts’ expectations yet again in its latest quarterly earnings report, generating revenue of $2.9 billion and earnings per share of 42 cents. That sent the company’s stock soaring above $76 during midday trading Thursday, doubling its IPO price of $38. That’s also more than quadruple the social network’s all-time low close of $17.73.

Screen Shot 2014-07-24 at 1.25.08 PM

Facebook’s massive turnaround has everything to do with mobile. When the company went public, its revenue was almost completely tied to desktop ads–exactly the kind of business investors in the mobile era don’t like. With more than half a billion people already accessing Facebook on mobile, the company had to prove that it could successfully transition its business. CEO Mark Zuckerberg set a laser-like focus on mobile strategy, and he forced his executive clique to do the same.

The dedication has paid off. Facebook now generates more than two-thirds of its total ad revenue on mobile and has more than a billion mobile monthly active users. Overall ad prices jumped 123 percent year-over-year, partially because mobile ads placed directly in users’ News Feeds are more valuable than ads on the right rail of the site served to desktop users.

But what really has Wall Street salivating is the fact that Facebook has plenty of mobile monetization moves left to make. New auto-playing video ads in users’ News Feeds could help the company lure marketers from television. Instagram introduced ads last year that are being positioned as an attractive option for brand marketers. The company is also likely to figure out ways to make money off its messaging goliaths Messenger and recently-acquired WhatsApp.

Overall, it’s clear that Facebook has solved its mobile conundrum, and Wall Street is rewarding it handsomely. With its share of the overall mobile advertising market quickly increasing, the company may soon to be able to challenge Google to be at the top of the totem pole of mobile.

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