Mark Hawtin, portfolio manager, GAM Star Technology, comments on the proposed Alibaba IPO…
The Alibaba IPO was announced and launched on Friday evening with a price range of USD60-USD66, which equates to a market cap of between USD147bn and USD162bn. The size of the deal is around USD21bn, making it the largest US IPO in history after Visa in 2008.
It will be the third largest ever after Agriculture bank of China in June 2010 (USD22.1bn) and Industrial & Commercial bank of China in October 2006 (USD21.9bn). It is, however, quite possible that a rise in price range, together with a small raise in size, could make it the biggest deal ever to come to market.
Unlike many technology IPO’s, Alibaba is highly profitable. Q2 revenues announced last week were USD2.5bn, equating to annualised revenues of USD10bn. However this dramatically understates the size of the business as in its Ebay style model, the company only publishes a revenue share of about 2%. The total transacted gross merchandise volume (GMV) over the Taobao and Tmall market places was actually USD248bn last year. It is widely thought that this exceeds the GMV of Ebay and Amazon combined.
The key points for investors to consider include:
• Corporate governance – the IPO has been delayed due to governance issues and the relationship between members of management and the company, as well as the share of profits the company takes from its financial services affiliate Alipay. The proceeds Alibaba will receive on any sale of Alipay was last month amended to be 37.5% of total proceeds, whereas before there was a USD6bn cap. These issues have been resolved to the satisfaction of the NYSE but investors remain mindful that Alibaba’s first inclination was to list in Hong Kong, but the local authorities were not comfortable with the company’s corporate governance.
• Mobile – Internet is as much about mobile as anything, and Alibaba’s mobile growth is spectacular. However, like advertising, mobile e-commerce attracts a lower level of fee. In the June 2014 quarterly report, while overall fees were 2.18% of GMV, mobile fees were only 0.98% of mobile GMV.
• Deal hype – This is a fascinating deal that will of course be very popular. The range is almost certain to rise and it will be important for investors not to get carried away by the hype.
Alibaba’s size, margin and growth profile is not dissimilar to Facebook. As a benchmark, Facebook has a current market cap of USD200bn and we foresee further upside to nearer USD250bn. On a comparable basis we could see Alibaba to be at least as valuable, possibly more so given the faster revenue growth. Ebay trades on 14x 2014 expected enterprise multiple (EV/EBITDA); Alibaba trades on 26x EV/EBITDA – 2x the multiple for 4x the revenue growth rate. Both these benchmarks suggest that within the range proposed, Alibaba looks good value.
