Chinese Dot-Coms Are Hot Again - Just Wait for Alibaba's IPO

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Chinese stocks are risky and volatile, and they were out of favor until just recently. However, momentum is shifting back toward growth stocks from the world's most populous nation, as is evident from the success of some of its dot-com darlings in their recent IPOs.

JD.com (JD) went public on Thursday. The online retailer -- previously known as 360buy -- is China's leading consumer direct seller, serving as the springboard for $20.7 billion in gross merchandise volume last year. The initial public offering was priced at $19, and it closed out the week above $20.

Two weeks earlier, Tuniu (TOUR) went public at $9. Tuniu is a leading provider of leisure travel services and specializes in packaged tours. It got off to a slow start, but Tuniu was the Nasdaq's biggest winner last week when it soared 52 percent.

The market's clearly warming up to Chinese Internet stocks; they're posting the kind of growth that warrants underwriters taking them public. But the buzz generated by JD.com and Tuniu will be no match for the enthusiasm that Alibaba Group Holding will garner when it begins trading this summer.

Alibaba's Astounding Advance

Alibaba is one of the world's most successful e-commerce company. It runs the Taobao online marketplace that was no match for eBay (EBAY) in China. But on the business to business -- or B2B -- front, its namesake site is a global juggernaut.

Alibaba watches over 231 million active buyers, and they placed 11.3 billion orders totaling $248 billion in transactions last year. Alipay is often called the PayPal of China, but it may be better to call PayPal the Alipay of the rest of the world. After all, Alipay helped facilitate $519 billion in total payment volume last year. That's nearly three times more than the $180 billion that PayPal helped clear last year.

There will be no shortage of attention when Alibaba goes public. Some analysts see it commanding a market cap of roughly $150 billion, or three times greater than value of Baidu (BIDU). Baidu is China's leading search engine and for years has been the emblematic of China's dot-com boom.

The amazing thing about Alibaba isn't that it has grown so large catering primarily to China's population. The real surprise here is that Alibaba is still growing at a frenetic pace. Revenue soared 72 percent to nearly $5.6 billion in fiscal 2013, which ended in March of last year. Revenue has climbed another 63 percent through the first three quarters of fiscal 2014.

Skeptics on China

Naturally there will be plenty of investors that don't want anything to do with China. The restrictive government makes operating a business a challenge, and that's even trickier for cyberspace. Every government restricts online content to some extent, but China is more extreme than most Western countries.

Regulatory agencies require folks signing up to social networking site to use their real names. Explicit content is naturally taboo, and the same goes for politically charged comments. These are the kind of red flags that wave hard compared China's own red flag, but some investors feel that the growth is too tempting to pass up.

Baidu went public at a split-adjusted price of just $2.70 nine years ago, and it's trading at nearly $170 today. This isn't the same kind of return that investors should expect out of Alibaba -- especially since it's already going to be hitting the market at a greater value than Baidu -- but it's strong proof that great returns are available for investors willing to take on the risks of buying into China and singling out the winners.

It won't always be straight up. In fact, as most global markets took a step up last year we saw the Shanghai Composite clock in with a 7 percent decline. However, momentum is building in 2014 with a few shiny new names to keep the market interested. China's dot-com growth darlings are back -- and growing in number.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu and eBay. The Motley Fool owns shares of Baidu and eBay. Try any of our newsletter services free for 30 days.

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