Jun 11, 2018 ยท 4 minutes

Of all the tech companies to go public in the past five years, none has had as much potential as Alibaba.

Alibaba wasn't just the Amazon of China, as coverage in the Western media explained before its 2014 IPO, it was poised to be Amazon on steroids – not simply disrupting and displacing China's retail infrastructure, but more like building an entirely new retail infrastructure from scratch.

Like Amazon, though, Alibaba had a rocky start after it went public. The stock fell as low as $59 a share in 2015, below its $68 a share offering price. Investors balked at the company's cloudy disclosure practices , while a controversy involving counterfeit goods dogged its retail marketplace. Founder Jack Ma even publicly griped that his life was “much worse” after the IPO.

The following year, Ma emerged from his pity party, working to turn the company around. Since then, the stock has risen to a record high of $207 a share Monday morning, having tripled the 39% rise in the Nasdaq Composite since the beginning of 2017. And Alibaba says it's just getting started remaking retail and commerce in China.

The most recent indication of that new confidence was the $14 billion raised last week by Ant Financial, which runs the Alipay service favored by Alibaba's retail platform. Ma controversially spun Ant off from Alibaba in 2011. In February, Alibaba took back a 33% stake in the company in exchange for certain intellectual-property rights that led Ant to pay Alibaba $330 billion a year in royalties, or about 38% of its pre-tax profit.

Alibaba could more than make up for those lost royalties through capital appreciation from its stake in Ant. Earlier this year, Ant was expected to raise between $5 billion and $9 billion from private investors at a valuation of $100 billion. Instead, it raised $14 billion and was valued at $150 billion, with much of the money coming from sovereign funds in Singapore and Malaysia, as well as firms like Silver Lake and Warburg Pincus.

If one were to consider Alibaba and Ant Financial parts of the same commerce conglomerate, the combined companies would be worth $659 billion, behind only Apple, Amazon, Microsoft and Alphabet in the global tech industry. And that's not counting all the delivery partners, distribution centers and other subsidiaries in which Alibaba owns a minority interest.

In its core business, Alibaba has been seeing accelerating growth. Back in 2016, when Pando noted the potential for a turnaround, revenue was growing at a rate of 39%. Last quarter, revenue growth had reached 61%. Some of that growth had to do with Alibaba moving into other Asian countries like India as well as its nascent cloud computing offerings.

But 90% of Alibaba revenue still comes from China, where Alibaba is making some bold experiments in remaking retail through an initiative it calls, somewhat uninspiringly, “New Retail.” The initiative began back when Alibaba was trading below its offering price. The company sees it as key to its goal of reaching a $1 trillion valuation by 2020.

As Mary Meeker's slides pointed out last week, China has the highest e-commerce penetration rate, with more than 20% of total retail sales happening through e-commerce (the rate is about 12% in the U.S.). New Retail is about connecting that other 80%, the brick-and-mortar stores, to Alibaba's platform. Here's how Alibaba co-founder Joe Tsai explained it recently.

In this process of digitizing the entire retail operation, we are driving a massive transformation of the traditional retail industry. It is fair to say that our e-commerce platform is fast becoming the leading retail infrastructure of China.  With this transformation, China’s five trillion US dollars in retail sales will be available to Alibaba as our total addressable market.

A key part of New Retail is its Hema supermarkets, which will let shoppers buy goods through their smartphones, like Amazon Go, but also order from their homes to have goods delivered in 30 minutes if located within 3 kilometers of a Hema store. Another experiment is a gargantuan vending machine with cars that shoppers test drive a model for three days before ever talking to a car salesperson. Still another will help mom-and-pop convenience stores manage inventory that reflects demand of consumers in the neighborhood.

Like any experimentation in the tech industry, Alibaba's New Retail is bound to face some disappointments and setbacks. But some who follow the Chinese retail industry are optimistic. Jeffrey Towson, a Peking University professor, wrote encouragingly about New Retail earlier this year:

“Alibaba is a pure breed. They are a pure digital competitor. They avoid buying and selling products themselves. They avoid owning most tangible fixed assets directly.... And for them “new retail” is basically adding a whole new set of users to their platform. They are adding physical merchants and their offline sales data. It is a massive expansion in their brands and merchants and in the participation and activities of their consumers.

Meanwhile, Ant Financial has been expanding well beyond Alipay, including wealth management and loans to small businesses and consumers. According to Reuters, Ant expects two thirds of its revenue to come from business-oriented financial technology within five years. Ant has been talking about its own IPO for several years, with the current thinking it could go public in 2019.

Adding to momentum could be a move by China to allow China-based companies like Alibaba that listed shares on an overseas exchange to also launch secondary listings on Chinese exchanges. That could make buying Alibaba shares much easier for the millions of Chinese consumers who use Alibaba's platform regularly.

Alibaba will still face growing pains like the counterfeit controversies of years past, and its corporate structure and financials remain opaque. But the momentum behind the company looks as strong as it has since it went public nearly four years ago.