Why U.S. Companies Don't Need Profits to Go Public
One remarkable thing about the forthcoming Alibaba initial public offering, compared with many other U.S.-based offerings, is the total losses Alibaba has racked up compared with its stateside tech cohorts: none.
As a Chinese company entering the U.S. capital market, Alibaba has to be profitable for U.S. investors to bite. By contrast, U.S. companies can get away with a promising idea, strong cash flow, and a good management team.
It might sound crazy and completely backwards, but those things can make all the difference. Just ask Drew Nordlicht, partner and managing director of HighTower, an investment services company for high-net-worth people in San Diego.
"Here, the capital structure and stock market have the ability to finance the future growth of a business, and that is what puts us at the forefront of the world economy," says Nordlicht.
In other words, investors might be willing to take a risk on a U.S. company with great potential, or good revenue growth with no profits, because they know ultimately the company will make money and returns could be high. And there is the possibility of an acquisition or an IPO exit down the line. Most Chinese companies would have difficulty gathering similar resources at home or abroad.
Let's look at some examples: Twitter notched $132 million in losses for the quarter ended March 31, compared with the same quarter a year earlier. Box, which has paused it's offering amid cooling investor sentiment toward unprofitable technology companies in April, reported a net loss of $169 million for its fiscal year, ended January 31, 2014.
Similarly, Coupons.com reported a loss of $14 million for its first quarter, ended March 31, compared with $8 million for the same period a year earlier. Coupons.com went public in March.
"We are really happy with the results of the first quarter," Steven Boal, founder and chief executive of Coupons.com, said, in a conversation after the company's first earnings call earlier this month.
Says Mir Aamir, the company's chief financial and chief operating officer, the losses were related to stock-based compensation, a standard expense after an IPO. (The company also reported losses of $59 million for the full year 2012, a 98 percent increase compared with the full year 2011. Net losses for the year decreased to $11.25 million in 2013.)
Alibaba, on the other hand, has huge profit and revenue growth and really strong margins. It reported profits of $3 billion on $6.5 billion in revenue for the nine months ended Dec. 31, 2013. That compares with $712 million in profit on $4.2 billion in revenue for the same period a year earlier, an increase of more than 300 percent for profits and 55 percent for revenue.
For the full-year ended March 31, 2013, Alibaba reported $1.4 billion in profit, an increase of 85 percent over the same time period a year earlier. That's on revenue of $5.6 billion, an increase of 72 percent compared with March 31, 2012.
There are probably plenty of companies losing money in China, too, says Nordlicht, but there's no chance they'd attempt a U.S. IPO. What's more, Alibaba has been around for decades, and Yahoo's sizable ownership stake also bolstered its presence in the U.S. and confidence in its offering.
"Our institutional community would never buy a Chinese company that was not profitable, and did not have substantial revenue growth and the best-audited financials," says Nordlicht.