Here’s Why You Should Watch Ant Group’s IPO: The Hottest Startup in the World

Oct 06, 2020 - 4 minutes read time

Ant Group’s IPO

There is no point in looking at e-commerce without mentioning Amazon. By the same token, there is no point in looking at the fintech scene without mentioning Ant Group.

Yes, it’s a funny name for a company. But this start-up is anything but small. Ant’s initial public offering (IPO) could come as early as this month. It expects to secure an overall market valuation of between $200 billion and $300 billion. This means Ant, as a fintech upstart, will be bigger than Bank of America, PayPal, Goldman Sachs, or Wells Fargo.

Who Owns Ant Group?

You are not alone if this is the first time you’ve heard of this funny-sounding company. It’s incubated by Alibaba in China. So most of us have never come across Ant’s services. But if you live and work in China, your life depends on it.

At the heart of Ant is a product called Alipay. Alibaba created Alipay back in 2004 as a payment tool for its online marketplaces. At the time, Internet retail was nascent. Logistics was spotty. There was little trust between buyers and sellers on the online platform.

Alipay

Alipay did something new. It held shoppers’ payments when they ordered. Then it released the money to merchants but only after shoppers confirmed they were satisfied with the goods they received. This way, Alipay deterred scams and prevented fraud.

How did Ant grow so fast?

Like all things in China, Alipay’s growth was epic. It captured a large group of first users. By 2019, the value of mobile payments in China reached $49.7 trillion. Alipay accounted for 55.1% of that market.

But it was collaborations with China’s largest commercial banks, and Jack Ma’s magic touch with regulators, that made Alipay, now part of Ant Group, the king of all fintech disruptors.

Ant goes beyond what PayPal and Apple Pay do. It offers services from payments to credit to insurance to investments within Alipay. Ant calls it the “ubiquitous super app.” More than half of Ant’s 2019 revenue came from financial services. It has more than 711 million monthly active users. This is a very unusual strategy by Silicon Valley standards. But Ant is part of Alibaba. In China, this is commonplace.

What do Ant and Alibaba have in common?

In my CNBC interview, I described how IT companies in China are far more vertically integrated. Silicon Valley’s tech giants tend to be broad in geography but shallow in offerings. In contrast, China’s tech firms tend to concentrate on their home market but go far deeper. The result? Alibaba or Ant Group developed new-to-the-world capabilities that are simply impossible for Western companies to replicate.

China is one of the world’s most competitive marketplaces. Alibaba or Ant has no choice but to keep branching out to new areas to increase “stickiness” with end-users. You can see how the company practically follows users to eliminate any fiction across transactions of all types. Amazon does it via 1-Click on its website. Alibaba and Ant do it everywhere, online, and offline.

Take Alibaba’s Taobao for instance. Its closest cousin would be eBay in the United States. And yet it’s nothing like eBay. Alibaba integrates with Weibo (like Twitter), Cainiao (like UPS), Baozun (like Shopify), Alipay (like PayPal), and AliCloud (like AWS) at a scale seldom found outside China. As a result, it has enabled Alibaba to anticipate demand, curate offerings, and forge new consumer habits to a far deeper extent than we thought possible. And all these are done with advanced artificial intelligence and automation.

How to Buy Ant Group IPO

Ant Group’s upcoming IPO is made available in Hong Kong and Shanghai. The Ant Group’s IPO might be a passive-aggressive escalation of China–U.S. tensions. Ant is snubbing Wall Street. Still, American index funds can include Ant’s H-share, which is listed in Hong Kong.

Hong Kong Flag

So is $250 billion a cheap buy? Most start-ups lose money even when they are unicorns. Uber lost $8.5 billion in 2019, the year it was listed on the New York Stock Exchange. It’s still valued at $55 billion today.

Ant has made a $3.5 billion profit in six months. Let’s assume it stops growing for the next six. It’ll still end the year with $7 billion. Compare that with a truly mature tech company like Netflix, whose P/E ratio is around 80. Ant would still have an estimated valuation of $560 billion.

But maybe you want to use a Chinese firm as a benchmark. Let’s take Tencent, another Chinese technology giant with a fast-growing payments business. It’s trading at about 40 times earnings. Applying the same multiple to Ant, that would imply a $280 billion valuation. Again, it’s assuming no profit growth in the second half of the year. Such a scenario is virtually impossible. Ant’s profit for the first half exceeded the full-year total for 2019.

Obviously, all eyes are watching the IPO of the decade. Now buckle up.

 

Stay healthy,

Howard Yu signature

PS. Who are your favorite FinTech disruptors? How do you see the future of retail banking? Any thoughts on Chinese tech giants versus those from Silicon Valley? Join in the discussion below. I’d love to hear from you.


Comments


5 comments

A
Anwar Jumabhoy Oct 07, 2020 at 3:18pm

Thanks, Prof Howard for an Interesting commentary. The Chinese eco-system is unique and cannot be replicated. Hence Chinese companies cannot operate outside, their home markets, unlike the US and others. Their strategy, therefore, is to buy into these markets - Uber & Grab are examples. They have bought into Lazada, Shopee, TouchnGo, etc.

Howard Yu:
H
Howard Yu Oct 08, 2020 at 7:30am

Thank you Anwar! That's great additional observation that you've provided. Yes, it's interesting to see how these tech giants are buying up Lazada and others as a way to getting into the international market.

D
Douglas Silva Oct 07, 2020 at 1:03pm

Thanks for the great heads up on the Ant Group's IPO. It came across to me a few weeks ago, but this article was really insightful.

Howard Yu:
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Howard Yu Oct 08, 2020 at 7:31am

Thank you, Douglas! You are right, I can't compete with on speed with the news outlets. My hope is that the synthesis would be of value. Thanks for your kind words!

S
Sonia Mortlock Oct 07, 2020 at 12:35am

Thanks for the great read. Ant is definitely the fintech to beat all fintechs, I wouldn't be surprised if it outgrows Alibaba eventually.

Howard Yu:
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Howard Yu Oct 08, 2020 at 7:32am

Thank you, Sonia! Yes, it would be fascinating to see how Ant evolves. Maybe it's like the story of PayPal versus eBay...!

M
Marc Rodenbaugh Oct 07, 2020 at 12:17am

Great article Howard! Ant Group is no doubt one of the largest IPO in history.

Howard Yu:
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Howard Yu Oct 08, 2020 at 7:32am

Thank you, Marc! I am glad that you like the piece.

S
Simon Lyons Oct 06, 2020 at 4:06pm

There's a business to business payments company called Monerium ( https://monerium.com/ ) that has a full European banking license and is transacting in Euros on the blockchain (Etherium). No other European payments company is anywhere near it (indeed Lagarde is only straing to look at this space). This is one to watch. Mightn't end up being a giant Ant but it will certainly be the frontrunner on disintermediating banks on euro B2B payments on the blockchain.

Howard Yu:
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Howard Yu Oct 08, 2020 at 7:33am

Hi Simon, thank you so much for the great insight! I'll look up on Monerium. Most fascinating!

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