Alibaba IPO Valuation

  • Alibaba is scheduled to launch its IPO this week, with trading on NYSE to begin mid-September.
  • We look at potential Alibaba valuation from three perspectives.
  • Anything lower than $160 billion will be a conservative valuation and could offer tremendous upside potential for shareholders.

Alibaba IPO valuation

Alibaba (BABA) is set to IPO in September 2014, with reports stating a possible IPO launch on September 8. The stock could be trading on the NYSE under the ticker ‘BABA’ as soon as September 19. We today take a look into what could well be one of the largest IPO’s of all time.

Alibaba is gigantic

Alibaba has a solid grip on the Chinese E-commerce market through platforms like Taobao and Tmall while also having a significant international presence through its Ali Express and Alibaba.com platforms. The company last week updated its F-1 filing to reflect its Q2 numbers, which are summarized below in comparison to eBay and Amazon, the leading e-commerce platforms globally.

Alibaba

eBay

Amazon

LTM revenue growth

49.3%

13.5%

22.3%

LTM Operating profit margin

45.8%

20.5%

0.8%

LTM Free cash flow margin

63.96%

27.3%

1.3%

LTM P/E

23.13*

892.21

LTM P/S

4.04

1.92

* eBay Adj PE ratio

Alibaba clearly outperforms eBay as well as Amazon on the metrics of Topline growth, profit margins as well as free cash flow generation. The June 2014 TTM free cash flow (FCF) for the three companies is displayed in the chart below.

Alibaba, eBay & Amazon TTM free cash flow chart

Alibaba Amazon EBAY Free cash flow trends

Alibaba not only generates a higher Free Cash flow as compared to Amazon and eBay but also has a staggering free cash flow margin of 64%.

Alibaba is larger than eBay and Amazon combined

Alibaba dwarfs Amazon and eBay when it comes to gross merchandise volumes which go through it's platforms. The chart below shows Alibaba GMV (Gross Merchandise Volume) in Q2 2014 in comparison to Amazon and eBay.

Alibaba, Amazon & eBay Q2 2014 GMV comparison

Amazon eBay Alibaba GMV comparison

*Amazon GMV as given by internetretailer.com

Alibaba GMV was 60% higher than that of eBay and Amazon combined, which puts in perspective the size of this Chinese behemoth.

Favorable Chinese e-commerce economics will drive Alibaba long term growth

Alibaba is at the crossroads of the rapidly growing Chinese middle class and favorable Chinese E-commerce dynamics. In addition, with Alibaba's huge presence in key e-commerce markets, the company is poised to see long term growth in earnings as well as revenue over the next few years.

Alibaba Valuation based on Amazon and eBay valuations

There have been various numbers quoted with regard to Alibaba’s IPO valuation. However, it is important that investors don’t get carried away by the hype surrounding the Alibaba IPO. So what is a reasonable valuation with regard to Alibaba IPO? We look at three possibilities to arrive at what could be a reasonable valuation for Alibaba.

The sheer size of Alibaba combined with its favorable growth tailwinds makes it an attractive investment opportunity for investors. As seen above, Alibaba is bigger than the combined strength of eBay as well as Amazon and has outperformed each of them by a huge margin on the metrics of topline growth, earnings growth as well as free cash flow generation. Hence a reasonable estimate of Alibaba’s valuation could be arrived at by summing the current market capitalization of eBay and Amazon, which is the current price the market is willing to pay.

Market Cap (in billions of $)

eBay

67

Amazon

160

Combined Market Cap

227

Going by this methodology Alibaba valuation could be in the range of $220 to $225 billion, which is a very aggressive estimate as we believe Amazon as a stock is cut off from its fundamentals.

Alibaba valuation based on eBay valuations

A second approach to Alibaba IPO valuation is using the adjusted PE ratio of eBay, which is profitable and hence is a good comparison on the measure of PE ratio based valuation.

Alibaba has significantly outperformed eBay over the last 12 months as seen above. Alibaba has maintained profit margins which are over 2 times that of eBay’s even while growing at twice the rate of eBay. While that is the past, the favorable Chinese E-commerce environment will likely catalyze Alibaba’s future growth rate making Alibaba’s current growth sustainable over a longer time frame. So what earnings multiple will be justifiable to arrive at a fair Valuation estimate for Alibaba?

eBay currently trades at an adjusted LTM PE ratio of 23. Based on the comparative performance over the last twelve months (LTM) and the future growth forecasts, we think an earnings multiple of 45 would be justifiable to value Alibaba. However, we use a multiple of 40 as a conservative estimate.

Alibaba generated $4 billion in LTM profits, after adjusting for one time equity gains in Q2 2014. Applying a conservative earnings multiple of 40, Alibaba could be valued at $160 billion.

Alibaba IPO valuation based on recent Chinese IPO valuations

Company Annualised PE at time of IPO
Jumei international holding

45.5

58.com

27.2

500.com

75

Sungy Mobile

26.4

Autohome

18.8

Average

38.6

Source: Seeking Alpha

It can be seen in the table above that Chinese companies have enjoyed an average annualized PE of 38.6 at the time of IPO. Based on the average annualized PE ratio of recent Chinese IPO’s, Alibaba valuation comes in at $153 billion. However, a note of caution is that none of these IPO’s were on a scale comparable to Alibaba, with all of them being valued at less than $5 billion. Also Alibaba’s growth on such a huge base and high profitability could attract a far higher multiple, hence we think a valuation north of $160 billion is likely.

Conclusion

We estimate Alibaba’s IPO valuation to come in anywhere between $160 billion to $220 billion based on three different approaches. However, we think a fair valuation will see the E-commerce giant valued around $160 billion with a TTM PE multiple of 40. Anything lower than a $160 billion valuation could offer tremendous upside potential over the long term.

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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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