Alibaba IPO: Mispriced But Reasonably Valued

  • Alibaba IPO ended day one of trading with a 38% gain, raising questions whether the IPO has been underpriced.
  • However the stock has traded lower in subsequent trading sessions, raising doubts if the IPO hype had caught up with Alibaba.
  • A comparison with other technology IPO’s of the past reveals that the Alibaba IPO was reasonably priced.
Alibaba IPO analysis

Alibaba (NYSE:BABA) IPO became the largest IPO in world history after the Jack Ma led company raised aggregate IPO funds of $25 billion. The company’s bankers exercised an option to boost the IPO size by 15% based on the demand. With Alibaba IPO behind us, we evaluate how the IPO has performed in relation to other large technology IPO’s.

Alibaba IPO was the largest IPO in the technology space, towering over the $16 billion Facebook IPO in 2012. In the overall IPO market the Alibaba IPO overshadowed Visa’s march 2008 IPO of $19.1 billion becoming the largest US IPO and also surpassed the global record of $22.1 billion held by the agricultural bank of China for its IPO sale in 2010. The table below shows the top ten IPO’s by funds raised.

Company

Date

IPO size (in billions of $)

Alibaba

19-Sep-14

25

Agricultural bank of China

7-Jul-10

22.12

Industrial and Commercial bank

20-Oct-06

21.97

AIA group

21-Oct-10

20.49

Visa

18-Mar-08

19.7

General Motors

17-Nov-10

18.14

NTT mobile communications network

12-Oct-98

18.05

Enel

2-Nov-99

16.59

FB

17-May-12

16

Deutsche Telekom

17-Nov-96

12.49

Bank of China

23-May-06

11.19

Source: Reuters

Has the hype caught up with Alibaba?

The media was focused on Alibaba’s IPO over the last two weeks. The IPO was oversubscribed on day 2 after the launch with the IPO price being raised on account of the huge demand. Alibaba ended the first day of trading up 38% from its IPO price of $68 per share. The huge first day pop could leave selling shareholders unhappy, as the underwriters might have left a large amount of money on the table. The table below compiles various US IPO’s by first day pop.

Company

IPO price ($)

First day closing price ($)

First day gain

Amazon

18

23.52

30.7%

FB

38

38.23

0.6%

Google

85

100.34

18.0%

Alibaba

68

93.89

38.1%

Visa

44

56.5

28.4%

Twitter

26

44.9

72.7%

The huge first day pop could mean that underwriters mispriced the IPO, costing selling shareholders and the company significant potential upside from the IPO. In turn, Institutional investors who purchased at the IPO price of $68 could have got their hands onto a gift.

However, following the first day pop, Alibaba has traded lower in subsequent trading sessions. It closed the last trading session (Sept 23rd) at a price of $87.17, 7.2% down from the first days close. So while the IPO could have been underpriced as implied by the first day pop, is it also possible that the post IPO hype has caught up with Alibaba?

Alibaba IPO valuation in comparison to other technology IPO’s

To answer the above question, we need to take a look at some of the other highly awaited technology IPO’s of the past and their valuations. We compare Alibaba IPO to that of Facebook, Google, Twitter and Amazon.

LTM Net profit (in millions of $) LTM sales IPO valuation (in millions of $) LTM PE at IPO LTM PS at IPO
Alibaba 4033.29 9356.54 167960 41.6 18.0
FB 652 4038 104000 159.5 25.8
Twitter -142.557 534.462 24000 NA 44.9
Google 190.716 2257.952 26400 138.4 11.7
Amazon -8.484 30.976 438 NA 14.1

Among the five companies analyzed, Alibaba generated more sales than any other company in the last twelve months immediately preceding the IPO. Moreover, Alibaba had monstrous profit margins (43%) in the twelve months preceding the IPO compared to the Google’s 8.4% net profit margin and Facebook’s 16.15%. Twitter and Amazon were unprofitable at the time of their IPO. In fact, Twitter IPO was one of the most expensive even though the valuations seemed modest.

On a price to sales valuation, Alibaba’s IPO can appear pricey with a price-to-sales multiple of 18, higher than that of Amazon and Google at the time of their IPO’s. However, when you factor in the hugely profitable operations of Alibaba and look at the price-to-earnings valuation, the company comes out on top in the IPO comparison with an LTM PE ratio of 41.6 (at $68 IPO price per share). This is significantly lower than the PE ratio of Google and Facebook at the time of their respective IPO’s.

In conclusion, while the IPO might have been underpriced, leading to the huge first day pop, the Alibaba IPO in comparison to other technology IPO’s appears to be reasonably valued, given the huge revenue and earnings growth potential of the company.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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