Open Sesame: What Is Alibaba Worth?

| About: Alibaba Group (BABA)

[Originally published on 5/6/2014.]

By Scott Redford, who works on IG's share dealing floor in London.

2014 so far has been the 'year of the IPO'; are investors too late to take advantage or are there some on the horizon that are worth your time? We now look at the biggest of the bunch: Alibaba.

Alibaba is set to list on the New York Stock Exchange in a matter of months. And while fundraising size is yet to be finalized, recent talk of new shares mean it could be the largest IPO ever seen. The biggest to date was Agricultural Bank of China's $22.1 billion offering in 2010: if it doesn't top that, the next milestone in sight will be the US record, currently held by Visa Inc (NYSE:V), who raised $19.7 billion in March 2008.

Alibaba was founded by Jack Ma, a former English teacher, in 1999. It offers bulk quantities of almost any product - from breath mints to Boeings - for impressively competitive prices ($0.01/kg and $61 million per unit respectively). Originally a business-to-business portal for Chinese operators, it has since grown to link importers and exporters from a reported 240 countries and regions around the world. In March 2013, Alibaba announced that it was preparing to go public. After failing to reach an anticipated deal with regulators in Hong Kong, it declared in September that it would be floating in the US.

The numbers on Alibaba are certainly striking. In 2012, business carried out on its sites accounted for close to 2% of China's entire GDP, and the sales it handled ($170 billion) were higher than those of eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN) put together. In recent years it has been responsible for approximately 70% of China's package deliveries; best estimates show the site has over 7 million registered vendors and 800 million listings.

Now comes the time when analysts, commentators, and pundits turn their attention to putting a value on Alibaba. Bullish valuations as high as $250 billion have been making headlines recently, whilst at the other end of the scale, some estimates have been as low as $80 billion. General consensus centers on projections in the $150-160 billion range.

Thanks to Yahoo's 24% ownership of Alibaba, some key financials have been publicly available to aid in valuation estimates. As always though, it is the unknowns that have analysts divided, the list of which is endless. They do seem, however, to boil down to three main variables: the short-medium term growth rate of e-commerce in China, Alibaba's potential operating margins, and what cut Alibaba will take on transactions carried out through its portal.

There are a number of ways to gain exposure and take a position on Alibaba's potential worth (or lack thereof). One increasingly popular method is to get involved in a grey market, where IG has again opened its book for clients to take a view on Alibaba's opening day market capitalisation. The price has been up above $250 billion, and down below $180 billion. Currently the call, driven by traders' views, sits at $204 billion. As the IPO filing draws near and speculation increases, that number is unlikely to stay still for long.

View IG's page on the Alibaba IPO here.

Of course, the feverish speculation and conflicting opinions make any investment in Alibaba's IPO a risk. Are any of the other major IPOs worth your time? Next week we address that question, looking at Saga and TSB's IPOs in the UK.

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Tagged: , , , Specialty Retail, Other, China
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