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Why You Should Brace Yourself For The Alibaba IPO

|Includes:AMZN, EBAY, Groupon, Inc. (GRPN)

The last decade has seen a rapid rise in Internet accessibility platforms and has created a boom in the e-commerce industry. Technology has revolutionized the ease of online retailing and e-shopping has greatly attracted Internet users across the world. Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY) are some of the leading players in the e-commerce space and have grown tremendously in the last two decades.

However, the Chinese e-commerce giant Alibaba is not to be left behind with its active user base of 231 million and transaction volume of $600 billion. The company's future growth story is also intact, thereby promising investors both value and growth. Alibaba is planning to go public with its IPO at a valuation of over $15 billion.

Alibaba operates via three business verticals: retail marketplace, wholesale marketplace and an online payment service. Several other location specific platforms like 1688.com, along with the primary platforms, make Alibaba Group a company that is genuinely threatening to become the world's leading e-commerce operator.

The eBay-like TaoBao is a marketplace for retail buyers and sellers. It has the upscale Tmall for select brands, which is more like Amazon.com. Its Juhuasuan is a Groupon (NASDAQ: GRPN) like platform. The wholesale marketplace includes platforms like Alibaba.com (Global customers) and 1688.com (Chinese customers).

Though Alibaba does not have the same scale of revenue as Amazon, because it does not directly sell goods and earns only ad revenues, it is far more profitable than Amazon. In Q2 2014, Alibaba posted a net profit of $792 million on sales of $1.8 billion, while Amazon posted a net loss of $41 million over a revenue of $17 billion.

While most e-commerce companies have struggled to convert most of their online active users into mobile users, Alibaba has one of the best conversion ratios (59 percent) in the industry with 136 million mobile users, which is even better than what Facebook (NASDAQ: FB) had when it went public in 2012 (54 percent).

Another important stat to note is the conversion of visitor to cash based on the average orders per user, which stood at 49 deals as on May 2014. This figure has shown a steady increase from 39 deals in 2012 and 33 deals in 2011.

Alibaba has the benefit of being a local Chinese company. China has approximately 618 million Internet users with 500 million of these, or roughly 81 percent, already accessing the Internet via mobile devices. Alibaba estimates that there are 302 million Internet shoppers in China and based on the overall number of Internet users, all indicators seem to be pointing to prospective growth for this number in the near future.

As per estimates available on Alibaba's public information, 7.9 percent of China's total consumption is transacted via online deals. With the growing usage of mobile devices, and adoption of online transactions, this rate could grow significantly over the next few years.

China's massive population would also act as a catalyst for Alibaba's prospective monthly active users in the near future. The number of deals per user has also been rising at an incremental rate. This indicates the high user engagement, or conversion ratio of Alibaba.

This rapid growth in last two years has come at a time when the bottom-line Chinese economy has been undergoing a cyclical downturn. When the country is back to double-digit growth in the next few years, Alibaba will be poised to grow multi-fold in revenue and profits.

Even with rising active users and number of deals per user, China's online commerce still trails the U.S. in terms of adoption rates. A significant growth in adoption rate can make Alibaba the biggest e-commerce company, both in terms of monthly active users and revenue.

Over the last few years, computing and telecommunications markets have been experiencing a paradigm shift as the world continues to embrace mobile and Internet use in mobile. In China alone 81 percent of Internet users do have access to the Internet via various mobile devices, including smartphones, feature phones, tablets and other hand-held and wearable gadgets.

Mobile Internet usage has been aided by the availability of smartphones and application platforms like Android. Therefore, while traditional web-based applications and platforms remain relevant, people are now doing many of their general tasks via handheld devices.

This transition is playing a pivotal role in the e-commerce industry as several merchants continue to chase highly engaging platforms to feature their ads, which could result in better returns on their marketing investments. Even companies like Facebook and Google strive to maximize their mobile monetization rates as more users continue to shift their emphasis to the mobile platforms. Alibaba is certainly on the right track with regard to this shift. The company commands 76 percent of all mobile e-commerce transactions in China, and with about 500 million active mobile users in the country and higher penetration still possible, there is a huge opportunity for growth.

Several reports are skewed towards an historical IPO, while only a few are disputing it. There are several reasons why Alibaba could command a high valuation. Its monopolistic status, high profit margins (more than 40 percent), high share of Chinese e-commerce and its expansion by acquiring a substantial stake in Weibo, an 18.5 percent stake in Youku Tudou, a 100 percent stake in AutoNavi and a 15 percent stake in JD.com.

This is without a doubt an IPO every investor should look into, as it presents the opportunity to be part of a compelling growth story.

Stocks: GRPN, AMZN, EBAY