Seeking Alpha
Research analyst, long/short equity
Profile| Send Message|
( followers)  

Summary

  • Investment banking valuations for ABABA have risen by over 400% in 18 months.
  • While AMZN has reported a loss of ~$40 million in the third quarter of FY 2014, ABABA for the same period has reported a net profit of ~$790 million.
  • Undisputed leader in the world's largest consumer market and expanding swiftly in emerging markets.

Finally, the day eagerly awaited by analysts, bankers, and the Seeking Alpha community has come as the most awaited IPO since Twitter (NYSE:TWTR), is finally knocking on our door.

I read a couple of reports on the much awaited IPO of Alibaba (ABABA) by fellow SA bloggers, and one thing is clear to me; I don't think anyone can, with certainty, value the company. There's just too much noise to work around with.

However, that shouldn't stop us from trying. But before I embark on a quest to find the value, I want to put myself in the hot seat and in the shoes of the banker who has upon him, the arduous task of zeroing in on the right price for the offering.

Because, let's face it, the banker isn't going to value the stock. He wants to sell the stock at the best possible price, and that's what, we, as investors have to think about if we are to make any sense of this opportunity.

The Pricing Phenomena

The easiest way to go about the process is to simply find comparable businesses and see at what prices they are trading, and attach a price to ABABA based on comparable stocks.

Sounds easy, doesn't it? You can look really hard into trying to find similar companies but my bet is there isn't a single company on this planet which is even remotely comparable to ABABA.

After all, there aren't many companies which run a thriving e-commerce business along with online retail and payment services, a shopping search engine, and if that wasn't enough, a whole unit focused on offering cloud computing solutions.

Moreover, in the past 6 months, ABABA has been on a buying spree. First, the company bought Tianhong for ~$190 million for a 51% stake in the asset management firm to boost its online financial services business. Ever since, the company has picked up stakes in a bunch of businesses from ChinaVision for its media content to Mogujie the famous social shopping service for ~$200 million.

In the last 10 days, ABABA has made two mind boggling investments, first in Tango, a social messaging app for ~$215 million picking up ~20% stake in the company, and secondly a paltry $20 million investment in the Chinese travel services firm, ByeCity.

Whether these investments are a strategic fit for the company or not is a question worth asking, but considering the company's unusual business mix, the investments don't seem odd to me.

With all these varied businesses in the fray, clearly there is no comparable entity which comes even remotely close to Alibaba.

My Take on ABABA

When Yahoo (NASDAQ:YHOO) sold approximately half of its 40% stake in ABABA in May 2012, the company was being valued at ~$35 billion. Yahoo sold ~500 million shares for $7.1 billion, which works out to ~$14 per share.

However, since then, the company's valuation has soared and is now reported at ~$150 billion. This brings the company's share price to ~$60 per share, a whopping 400% growth in the last 18 months.

Moving forward, if global investment banking firm Macquarie's prediction is to be trusted, Alibaba's potential IPO may only contain its e-commerce business platforms, which include Alibaba.com, Taobao, and Tmall.com.

If this is true, I will attempt to price the company's stock in comparison to its closest competitors in the American e-commerce landscape viz. Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY).

Unlike AMZN, ABABA's business model is focused on bringing buyers and sellers together and does not hold any stock by itself like AMZN. This may be the reason why ABABA's top line is well below AMZN's. However, unlike AMZN, the most recent quarter saw ABABA post a healthy net profit ratio of ~44% as against the quarterly loss reported by AMZN.

(click to enlarge)

ABABA reported a top line of ~$1.8 billion in the most recent quarter, annualizing the figure gives us an annual top line of ~$7.2 billion.

Applying AMZN's price to sales ratio to ABABA's top line (e-commerce business only) gives us a value of ~$17 billion.

Moving forward, applying eBay's price to sales multiple to the same revenue figure gives us a value of ~$30 billion.

While the numbers are a far cry when compared to current valuations, i think much of the value is being derived from the group's overall performance.

Final take

The company continues to record robust growth in its top line figures and alongside actively investing huge amounts of money earning an impressive return on equity of ~23% to sustain its growth.

I believe, the company is being valued at exorbitant levels considering the fact that most of its investments are in areas the company has no prior operating experience. Moreover, it is difficult for me to figure out, at this point in time, how these investments will fit strategically in the overall game plan of the company.

While a part of me says that the company is trying to establish itself as the world's first multi-level internet company, with no apparent precedent to this type of structure, it will be difficult to predict the company's future path at this moment.

In my view, the stock is extremely risky and fails on all counts of traditional value investing and should be largely avoided by the investing community at large.

Source: Alibaba: This IPO Is Going To Be A Roller Coaster Ride