The whole world has been abuzz for a while at the expected IPO of the Chinese ecommerce juggernaut, Alibaba. At the midrange of it’s expected pricing, the company will be valued at almost $160bn, and the Founder and de facto emperor Jack Ma will be worth around $15billion, a sum which he has pledged to give a large part of to philanthropic causes. Not a bad way to enter the world stage.
For you and me, though, what is more important is this: if I buy shares in Alibaba, what exactly am I paying for? I’ll take a stab at this, but my thoughts are by no means exhaustive.
In the first place, Alibaba, like most internet companies based in China is organized as a Variable Interest Entity (VIE). This is a fancy way of saying, when you buy shares in Alibaba, you aren’t buying shares in Alibaba, you’re buying into a holding company in the Cayman Islands that is contractually entitled to Alibaba’s profits. The actual company domiciled in China is still owned by Jack Ma and a few cofounders and partners. Chinese companies do this as a way of going around government restrictions on foreign investors participating in China’s internet. It might not be a problem for you, but it’s something you need to be aware of. You still get profits, but it’s relatively easy for Mr. Ma and friends to override any control you as a shareholder of a public company may try to exert on it. My guess though, is that unless you’re an Ackman, or Ichan or Einherdt, you don’t care too much about controlling Alibaba. You just want your appreciation/earnings. As it’s listed on NYSE, you’re likely going to get it.
As far as valuation, the 400 pound gorilla in the space has always been Amazon. Consider Alibaba the 800 pound silverback then. First off, it’s like Amazon, Ebay and Paypal rolled into one company, dominating all the key segments of the ecommerce value chain, which gives it enormous synergies. 2013 revenues were around $250 billion, making Amazon’s $74bn look puny in comparison. It also manages to get $0.43 in profit for every dollar in sales. Amazon has managed a mere $0.20 on its best day, and something like $0.01 per dollar of sale on average. It has more than 250 million active users and dominates a good 80% of online retail in China. Basically, this is the Moby Dick of stocks. If it’s valued with comparable multiples as Amazon and co, it’s easily worth close to $200 billion.
Make no mistake, Alibaba will eat Amazon’s lunch. Maybe not in the United States, with two, one or even same day shipping, but internationally, where they are both almost on equal footing. Amazon has been investing in warehouse infrastructure in Europe and around the world but building those out and managing all that inventory risks cutting away it’s bottom line. Alibaba has no such problem, it sells from factories direct to both wholesalers and retail. They have the advantage on Amazon’s pricing game. Once they become more popular everywhere else, as I believe they will post IPO, they will rake in even more revenue.
It does have some challenges, it’s growing slightly slower than it used to, and of course some areas of it’s business aren’t doing as well, but overall, this is an incredible company and the challenges are solvable.
Put money in your brokerage account way before IPO day.
I think it’s a buy.
(If you can’t wait for IPO day, Yahoo and Softbank have significant stake in the company and their shares should rise with Alibaba. Of the two, Softbank is the better bet. It has more synergies with Alibaba, and I’m not a big fan of Yahoo’s management.)
Anways, my two cents.
What do you think?
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