"Alibaba Group needs to raise substantial amount of capital for it to maintain a dominant position in the e-commerce space. Not just maintain but really expand their competitive position," Jiong Shao, Regional Head of Internet & Chief China Strategist at Macquarie told CNBC Asia's "The Call."
Chinese startups like 360buy.com, which raised $1.5 billion last year from a group of investors, along with online services firm Tencent's recent "huge push" into e-commerce could erode Alibaba Group's market share, according to Shao.
"Without a very solid cash coffer, Alibaba Group could potentially lose its competitive advantage in this area," he said.
The company, which runs the popular online marketplace Taobao, will pay Yahoo $7.1 billion for 20 percent of its 40 percent stake. Yahoo initially bought the 40 percent stake for about $1 billion in 2005.
Reuters reported on Monday that Yahoo had built in incentives in the deal for Alibaba to hold an initial public offering by the end of 2015. According to the report Alibaba would buy back half of Yahoo's remaining stake — a 10 percent holding — at the IPO price or allow Yahoo to sell those shares in the offering before end-2015.
According to Shao, if plans announced in February to privatize the company's struggling subsidiary Alibaba.com are finalized, a group IPO could in be the works between next year and 2015.
"Alibaba.com is the worst asset they have," Shao said, referring to a 25 percent year-on-year drop in first quarter profit for China's largest listed e-commerce firm.
He adds, "Now that Alibaba.com is back to being privatized, they're just going to list the whole company, instead of listing a bunch of different entities of the company."