Alibaba Estimates Are Getting Frothy, Caution May Be Warranted

| About: Alibaba Group (BABA)


Softbank and Yahoo shareholders may want to hedge their positions pre-Alibaba IPO.

Estimates of Alibaba's value have grown from less than $40 billion to $250 billion in a year.

Relatively little is known about Alibaba making it difficult to accurately/confidently value.

When I first started writing about Alibaba (ABABA) a little over a year ago it was valued at around $30 billion.

YHOO has retained a 20% share in Alibaba, and provides an investor a way to indirectly participate in the Alibaba IPO. Currently Alibaba is valued at $38 billion. YHOO is currently worth $23 billion; $8.3 billion or 36% of its capitalization is the after-tax worth of their Alibaba holdings and net cash from their recent sale. Remove the Alibaba contributions, and YHOO is really worth $14.7 billion. A solid IPO could easily move the stock price of YHOO.

As it turned out Yahoo (YHOO) retained a 24% stake in ABABA and in now required to sell at least 10% in the upcoming IPO. Since that original article I wrote a series of articles tracking the analysts' estimates for ABABA.

The trend of increasing estimates for YHOO and Alibaba continued throughout the entire year. By October, valuations for Alibaba were scratching $120 billion...By October the estimates were between $100 and $200 billion.

Now articles are out claiming that ABABA is worth $250 billion in the "gray market."

The hype surrounding the float of Chinese e-commerce giant Alibaba climbed one notch higher on Thursday, with one London-based spread better revealing expectations of an initial valuation reaching as much as $250 billion.

A "gray market" for its shares has sprung up after the company announced on Sunday that it had decided to begin the process of an initial public offering (IPO) in the United States, ending months of speculation. This unofficial pre-market enables traders to place bets as to what level its market capitalization will close at after the first day of official trading.

London-based spread better IG Markets told CNBC that the highest bid it had received for Alibaba's valuation had been $250 billion. It had received no sell orders. "It's IPO central around here at the moment," Brenda Kelly, a market strategist at the company told CNBC via telephone. A figure of that magnitude would mean Alibaba would emerge as the world's tenth-biggest company by market value, according to Reuters data.

While I don't doubt the ABABA IPO is going to be big, I sniffed that out over a year ago, the problem is most analysis, including my own, is based upon other analysts' estimates. I don't have the resources to fully vent ABABA so I've relied on the opinions and estimates of major Wall Street Brokerages. Problem is, as this video points out, they may not have much more information than I do. In the video Aswath Damodaran, NYU Stern professor of finance, makes the following comments (note: quote copied directly from the video transcript so grammar and punctuation may be off):

I'm amazed that people can have a valuation with what the company has. It made about $8 billion to $9 billion in revenues. It's a very profitable company. It's an advertising company. But beyond that, we know, this morning, I put up about 100 articles on Alibaba's valuation. and every one of them was constructed around one word, China. That's all they said. The company's worth a lot because it's China. There's nothing more to the story right now than that big country. Given that it's the dominant player in its space, in one of the biggest burgeoning internet markets in the world, doesn't that put a premium valuation on it? It already is. A company, $8 billion in revenues shouldn't be trading at $150 billion without a premium. We're attaching premiums on top of premiums. I found China. I found disruption. I sound strategic considerations. I found every buzzword thrown into every article about the company. My sense is when people use these words it's because they don't have the numbers to back them up yet.

Here is the blog posting Aswath Damodaran posted on his website mentioned in the video. Interesting, Dr Damondaran and I seem to share common interests, and he gets the same reactions from readers that I often do. Here is a quote from his Bitcoin posting. Personally I find it disappointing and unfortunate that such a fine and reasonable mind allows a small vocal/insulting minority to censor his analysis. I view our roles as analysts, educators and authors to break down the walls of ignorance and narrow mindedness, and not to surrender and/or self censor due to those who attempt to insult and intimidate those they disagree with into silence. When the cyber-bullies win, we all lose.

Bitcoin Q & A: Bubble or Breakthrough? Both! Cult or Currency? Both!

As I have talked about or written on topics, I have learned that there are hot-button issues that almost always attract firestorms. Thus, when I write about Tesla, Apple or Facebook, I am guaranteed to provoke reactions, some strongly supportive and some strongly opposed, some rational and some emotional, but these reactions, for the most part, are determined by the pre-dispositions of the readers, rather than my views. In fact, my posting acts like a Rohrsbach test, with readers taking a portion of the post that is in line with or opposed to their positions, and either ignoring or discarding the rest of what I have to say. That, in part, is why I have stayed away from posting on Bitcoins, even as news stories about it, good and bad, have hit the headlines, since the world seems to be divided among the true believers in Bitcoins (who will brook no disagreement) and the cynics (who consider anything positive that is said about it to be a sign of gullibility).

Anyway, back to ABABA. Because of the "frothy" environment of the upcoming IPO, and the lack of detailed information required to fully value ABABA, it may be prudent for shareholders of Yahoo and Softbank (OTCPK:SFTBY) to hedge their positions prior to the IPO. To do this, current shareholders may want to buy at or near the money put options just in case the ABABA IPO fails to live up to the hype. Facebook (NASDAQ:FB) had a lot of hype before its IPO and we all know how that one turned out.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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