Ant Group, previously known as Ant Financial, gained approval from Chinese and Hong Kong regulators as it looks to go public sometime this month. The company is expected to raise $35 billion at a valuation of $250 billion which would make it the largest public offering in history, surpassing the Saudi Aramco IPO.
In such a short time, Ant Group has become a juggernaut with a dominant position in online banking, digital payments, and e-commerce payment processing, especially in Asia.
This valuation would make Ant Group worth more than nearly every financial or fintech stock currently listed in the United States other than JPMorgan (JPM), Visa (V), or Mastercard (MA). Of course, this is more impressive given that the company is just over a decade old.
Given the recent strength in the IPO market for fast-growing tech stocks and the massive gains in fintech stocks, it wouldn’t be surprising to see its IPO oversubscribed. Already, its parent company, Alibaba (BABA) has said it will be buying 22% of the offering which will increase its stake from 35%.
Since Ant Group is being listed on the Hong Kong and Shanghai exchanges, interested investors can see if their broker offers trading in those markets. Other options are to invest in Alibaba (BABA), who will own a sizable stake in Ant Group, or consider ETFs like the Renaissance International IPO ETF (IPOS), KraneShares China CSI Internet ETF (KWEB), iShares MSCI China ETF (MCHI), and the SPDR S&P China ETF (GXC) which are expected to add shares of Ant Group in the coming months.
Ant Group actually started as a solution to a problem that Alibaba faced in growing its business to business and business to consumer online marketplaces. Growth was hindered by the lack of financial infrastructure. In the early days of the Internet, there was a lack of trust between parties that payment or shipments would be made. Alibaba had to build this itself to foster the growth of its eCommerce system.
From these humble beginnings, it’s become a financial portal for companies and individual’s financial decisions including investing, wealth management, insurance, lending, etc. The payments product is basically a funnel that brings users into eventually using Ant’s more higher-value, higher-margin products and services. This makes Ant an amalgam of an insurer, broker, bank, and fintech company.
It’s been spectacularly successful, with nearly 1.3 billion users. During the coronavirus, user growth and revenue per user has increased.
Ant Group’s rise has been phenomenal. It’s not inconceivable that over the next decade, it passes BABA in market value given the size of its platform and monetization opportunities. Many believe the platform will grow to over 2 billion users over the next decade.
Another impressive stat about Ant Group is that it handles more payment volume than Visa (V) and Mastercard (MA) combined. Combined, these giants handle $16 trillion, while Ant handled $18 billion in 2019. And, Ant is growing at a much faster rate than these companies.
Ant Group generated $10.5 billion in revenue in the first half of 2020 which is a nearly 40% increase from the previous year. Most of the revenue came from digital payments, while credit, insurance, and investing accounted for the remainder. It posted a $3.4 billion profit in 2019.
Ant Group benefits from network effects like some of the most successful businesses of this era. It’s more likely that people will join a payments network if people are on it. Once people are on its platform, Ant has numerous opportunities to monetize especially as engagement increases.
While some investors are focused on the IPO, other parts of the market will be affected as well in different ways. On the positive side, Alibaba and MoneyGram International (MGI) are likely to benefit, while Tencent and JD.com (JD) are two who will lose.
Alibaba is probably the simplest and straightforward way for US investors to participate in the Ant Group IPO. Not only does it own a sizable chunk, but its eCommerce platform is also synergistically connected to the Ant Group ecosystem. People who use AliPay are more likely to shop on Alibaba’s properties, and vice-versa.
Overall, Alibaba is reasonably priced from a growth perspective as it has a forward price to earnings ratio of 25.8 even though it’s growing sales at a 33% clip with 44% gross margins. This makes it much cheaper than US-based mega-cap tech stocks like Amazon (AMZN), Facebook (FB), or Apple (AAPL).
From a technical perspective, it’s defying the recent dip in the market as it made new highs this past week. The stock looks poised to breakout, and the Ant Group IPO could be a trigger for a more meaningful move higher.
BABA’s POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Peer Grade, Buy & Hold Grade, and Industry Rank. Among the 115 stocks in the China industry, it’s ranked #1.
MoneyGram International (MGI)
MGI is an interesting stock. Currently, it currently has a market capitalization of $315 million. Ant Group tried to buy the company for $1.2 billion in 2018. However, the deal was blocked by US regulators.
Since then, MGI’s stock has dropped by more than 60%. The upcoming election may bring with a change in regulatory attitudes which would mean that a deal could be struck.
MGI’s stock is also interesting as a turnaround play. It’s expected to turn profitable next year and looks to be emerging from a two-year sideways range. It’s also an attractive stock for anyone who is looking for a beaten-down, fintech stock that qualifies as a value play given its price to sales ratio of 0.26.
Like Alibaba, Tencent is a tech conglomerate. Its most popular product is WeChat which is the dominant social network and messaging platform in China and many parts of Asia. It also has a fintech product, WePay which has 200 million users.
Yet, it’s the clear #2 to Ant Group. Ant Group’s IPO will give it more resources to grow. Although Tencent will continue to have opportunities and ways to keep growing, it’s likely to end up in second place. When we look at other Internet sectors, the category leader tends to earn the bulk of the profits.
Similar to Ant Group, Tencent is not listed in the US. However, there are certain ETFs that hold shares including the ARK Fintech Innovation ETF (ARKF), ARK Next Generation Internet ETF (ARKW), and the Gadsen Dynamic Multi-Asset ETF (GDMA).
JD competes with Alibaba in terms of eCommerce. It has a number of structural disadvantages including the lack of network effects that keep people in the Alibaba ecosystem.
Therefore, it’s going to have a tougher time keeping up with Alibaba. The stock has had a good run, nearly tripling so far YTD. This has also lifted investors’ expectations, however, the company is forecasting only 6% annual earnings growth over the next five years. This means that the company will have to figure out new growth drivers to validate investors’ expectations.
So, it’s understandable that JD’s task becomes more difficult if AliPay’s IPO gives it more resources to grow which also boosts Alibaba’s ecosystem. JD doesn’t have the same type of network effects that are so beneficial to Alibaba’s business which means its slim chances of exceeding Alibaba are even more diminished following the Ant Group IPO.
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BABA shares rose $0.18 (+0.06%) in after-hours trading Friday. Year-to-date, BABA has gained 46.12%, versus a 8.97% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles. More…