September 18, 2014
Prepare for liftoff: Alibaba is the ‘anti-Facebook’ IPO
Updated from Sept. 17
The Alibaba IPO is going to be huge — in case you hadn’t already heard. But for all the focus on how this is likely to be the biggest public offering in history, there’s very little chatter about the opportunity for this to be an old-fashioned, 1990s-dot.com style blowout IPO.
Assuming the offering prices near its expected range of $66 to $68 per share, it’s not hard to imagine the stock trading well above $100 on its first day of trading Friday. You know…the type of deal that gets trader’s hearts pounding and reminds investors that the stock market is also a place where you can win big, not just lose your shirt. Expect terms like “blowout” and “spectacular” and “bubble-like” to be heard. (Full disclosure: my employer, Yahoo Inc., owns about 22.5% of Alibaba and plans to sell about 25% its stake at the offering. I personally own Yahoo shares.)
In many ways, Alibaba is the anti-Facebook IPO. Facebook, of course, struggled mightily on its first day of trading amid technical glitches and an avalanche of insider selling, closing up a mere 23 cents from its offered price of $38.
The Chinese e-commerce giant is virtually unknown to Americans. A Reuters poll this week showed 88% of people hadn’t even heard of Alibaba, much less were clamoring for a piece of the offering. Facebook, by contrast, was set up to be the first big “retail” IPO of the decade — and individual investors were scrambling to get allocation before the company’s ill-fated debut on May 18, 2012, according to press reports at the time.
For Alibaba, however, there’s no such retail interest: Alibaba Frenzy Escapes Small Investor:
Lack of Familiarity with Alibaba in U.S. Limits Interest Ahead of IPO, The WSJ reports.
Meanwhile, institutional demand for Alibaba’s offering has reportedly been intense; more than 40 firms have asked for over $1 billion in stock, according to The WSJ. Within two days of Alibaba’s global roadshow, underwriters attracted enough demand to cover the entire deal. Shortly thereafter, Alibaba upped the expected price range of the offering to o $66 to $68 from $60 to $66, originally.
In the run-up to Facebook’s IPO, institutions were already choking on stock that had been purchased in the secondary market. On the first day of trading, lead underwriter Morgan Stanley reportedly got stuck holding more than $6 billion of Facebook stock, with JPMorgan and Goldman sitting on a combined $5.6 billion worth of shares. Days before its IPO, Facebook upped the size of its IPO by 25%, or about 100 million shares; 57% of the shares sold in the IPO came from Facebook insiders.
To date, Alibaba hasn’t announced plans to up the size of its offering, although it wouldn’t surprise me if they did.
Alibaba’s valuation vs. peers (Source: WSJ)
Perhaps Alibaba’s underwriters — Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and Citigroup — will suffer a similar fate, but there does not seem to be a frenzy of pre-IPO buying and selling of Alibaba shares, at least not in any formal (legal) way. That said, The WSJ reports that about $8 billion worth of shares owned by insiders will be freed of any “lockup” restrictions and thus available to immediately sell the IPO.
Most importantly, Alibaba is the anti-Facebook IPO because at about 24 times expected 2015 earnings, it’s valuation is cheap relative to peers and certainly conservative on an absolute basis.
According to Bloomberg:
- Alibaba trades at 29 times analyst earnings estimates for the fiscal year ending March 31 vs. 34 times for Bidu, 37 times for Tencent Holdings and 135 times for Amazon.com.
- Alibaba’s EBIDTA equals 59% percent of revenue, more than Google Inc., Facebook Inc., Amazon.com, Baidu and Tencent, according Wedbush Securities. (By contrast, Twitter and Chinese e-retailer JD.com have negative Ebitda margins.)
At the time of its offering Facebook, traded with a trailing P/E of 107 and price-to-sales of about 26, based on figures from its final amended S-1.
Even at $100 per share, Alibaba would “only” trade with a forward P/E of 40, roughly equal to Facebook’s current valuation and vs. 168 for Amazon.
“Based on the cashflow they are generating and the growth rate, you can defend $100 relatively easily,” Henry Blodget says in the accompanying video. “It’s a high multiple [and] hundereds of things can go wrong…but given the growth trend and oppourtnity and market position, the stock could trade [at $100] and not be ridiculous.”
While offering a warning to individual investors about the dangers of buying IPOs and specific concerns about Alibaba’s governance, Blodget adds: “We’ve seen again and again, inventors are willing to overlook the hazy future and pay for growth and this thing has growth like you would not believe and growth at massive scale. A lot of big mutual and investors who’ve been starved for big, fast-growing companies” are going to be scrambling to get into Alibaba.
What Alibaba and Facebook do have in common is a complex management structure designed to maximum the power of its respective founders, Jack Ma and Mark Zuckerburg. Maybe I missed it, but I don’t recall as many warnings about Zuck’s ownership ahead of the Facebook IPO as I’m hearing now about Alibaba’s.
Of course, there’s a risk if Alibaba really is the “anti-Facebook”. After falling as much as 50% from its IPO price, Facebook shares have since quadrupled. It’s not how you start the race, it’s how you finish but expect Alibaba to come out of the gates at a full gallop.