The Alibaba IPO of September 19 2014

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss with you, the “Alibaba Group Holding” that went IPO on Friday September 19, 2014.

ABOUT ALIBABA HOLDING GROUP:
Alibaba Group Holding Limited (NYSE: BABA) is China’s largest retailer.

Originally founded 1999 by an English schoolteacher by the name of Jack Ma, Alibaba has carved its place via alibaba.com, which connects Chinese suppliers of pretty much anything with buyers, within the Chinese Internet consumer market and expanded its reaches into every single possible thing, from online auctions to messaging and payments.

Alibaba.com has since expanded to launch other websites – including Taobao and Tmail – which now dominate the e-commerce market.

It also has major investments in the Chinese equivalent to Twitter (Sina Weibo), a YouTube-esque site called Youku Tudou and owns 50 percent of China’s most successful football club, Guangzhou Evergrande.

In 2012, two of Alibaba’s portals together handled 1.1 trillion yuan (US$170 billion) in sales, more than competitors eBay Inc (NYSE: EBAY) and Amazon.com Inc (NASDAQ: AMZN) combined.

The company’s turnover in 2013 was US$6.73 billion and is expected to be much more this year. As a comparison, Facebook made US$3.7 billion in 2011, just before it had its own IPO which ended up giving the social networking company a value of more than $100 billion. More exciting is the company’s increase in profits, which have tripled in a year.

As can be seen from below pie-chart, it is responsible for 80 percent of all online sales in China – the world’s second biggest economy after the United States – and handles more transactions than eBay and Amazon combined.

The company primarily operates in the People’s Republic of China, and in March 2013 was estimated by The Economist magazine to have a valuation between US$55 billion to more than US$120 billion.

Furthermore, Alibaba’s strategy of creating a worldwide e-commerce empire with its own financial services has attracted close scrutiny from China’s regulators and resistance from the country’s banks.

THE ALIBABA GROUP IPO:
An IPO could further fuel the company as it continues to gain control over the mobile shopping and social media venues.

On 5 September 2014, the group—in a regulatory filing with the U.S. Securities and Exchange Commission—set a US$60- to US$66- per-share price range for its scheduled initial public offering (IPO), the final price of which would be determined after an international roadshow.

Let us flex the numbers in below table to see what the Chinese e-commerce giant might fetch in an IPO.

With is IPO date of September 19, it is  going to release 368 million shares (with a starting price between $66 and $68 per share) onto the New York Stock Exchange in order to raise around US$25 billion in funds that it can then use to expand the company to the US and Europe.

• On 18 September 2014, Alibaba’s IPO priced at US$68, raising US$21.8 billion for the company and investors. Alibaba is the biggest U.S. IPO in history.
• On September 19, 2014, Alibaba’s shares (NYSE:BABA) began trading on the NYSE.
• The stock opened at US$92.70 shortly before noon ET and quickly rose to a high of US$99.70, before paring gains to close at $93.89 an increase of 38 percent on its market debut.
• Some 271 million shares changed hands on the IPO date.

Below chart shows the performance of the Alibaba Group shares on their market debut date of Friday September 19, 2014.

Alibaba flags and banners decorated the NYSE façade in orange and white. Inside, executives mixed with a press pack including 130 Chinese journalists, reflecting the excitement in Alibaba’s home market around its offering

PGM CAPITAL COMMENTS:
At the close of the market on Friday, September 19 2014, the Chinese e-commerce company had officially logged the biggest Initial Public Offering (IPO) in US history, raising US$21.8 billion in its first day on the New York Stock Exchange.

Less than half of the funds raised will actually go into Alibaba’s accounts, however, with the rest a moneymaking bonanza for insiders. The biggest windfall in terms of pure cash goes to Yahoo, which received 40 percent of Alibaba in exchange for US$1 billion and control of Yahoo China in 2005.

Yahoo already made US$7.6 billion when it sold some stock back to Alibaba in 2012. Now it has earned about US$8.3 billion from a quarter of its remaining stake, while still retaining 16.3 percent of the internet giant.

The company’s earnings give it a market capitalization of over US$231 billion, “putting it at the close of the market on Friday September 19,  among the 20 biggest companies by market cap as can be seen from below table.

No.	Ticker	Company	Country	Market Cap	P/E	Price [USD]
1	AAPL	Apple Inc.	USA	604.53B	16.31	100.96
2	XOM	Exxon Mobil Co.	USA	414.18B	12.37	97.12
3	GOOG	Google Inc.	USA	403.18B	31.23	596.08
4	MSFT	Microsoft Co.	USA	391.55B	18.07	47.52
5	BRK-A	Berkshire Hathaway Inc.	USA	347.68B	18.07	212000.00
6	JNJ	Johnson & Johnson	USA	304.56B	19.96	107.99
7	WFC	Wells Fargo & Company	USA	278.56B	13.18	53.36
8	GE	General Electric Co.	USA	263.79B	18.01	26.29
9	ROG.VX	Roche Holding AG	Switzerland	258.42B	19.70	292.71
10	RDSA.AS	Royal Dutch Shell plc	Netherlands	255.53B	15.23	78.75
11	NVSN.VX	Novartis AG	Switzerland	253.73B	23.95	93.90
12	0491.HK	China Mobile Limited	Hong Kong	250.86B	13.18	61.43
13	WMT	Wal-Mart Stores Inc.	USA	247.62B	16.08	76.84
14	NESN.VX	Nestle SA	Switzerland	240.89B	21.30	74.70
15	0857.HK	PetroChina Co. Ltd.	China	238.952B	11.38	134.51
16	CVX	Chevron Corporation	USA	236.99B	11.91	124.80
17	BABA	Alibaba Group Ltd	China	231.90B	300	93.89
18	JPM	JPMorgan Chase & Co.	USA	229.85B	15.79	61.11
19	PG	Procter & Gamble Co.	USA	228.65B	21.60	84.47
20	VZ	Verizon Communications	USA	208.71B	10.69	50.35
21	HSBC	HSBC Holdings plc	UK	206.84B	13.45	53.95
22	TM	Toyota Motor Co.	Japan	203.57B	10.94	118.76
23	FB	Facebook, Inc.	USA	202.56B	84.68	77.91

Above table shows that Alibaba, which became the largest USA IPO, based on its closing price of Friday, September 19, ranked as the world’s 17th biggest company by market capitalization.

Above table proves also that most of the companies in the top 23 table have very high valuation, which due to this can therefore be considered overvalued.

Alibaba IPO goes to the extreme of what we have saw last year with social media stocks IPO, flying high with (almost) no fundamentals to back up their stock price and subsequent market cap.

To those who believe they have to go with the flow and that Alibaba is worth whatever the market says its worth, please indulge us in a little rundown of reasons why Alibaba at current price is overvalued:

• 300x times current earnings – it takes a lot of real earnings growth to justify such a lofty multiple.
• Little room for expansion (at least in China) – Anyone who wants to be listed on Alibaba is listed on it. The only real new businesses who sign up for it are new businesses.
• Little room for increasing share of current customers – Alibaba, for now, serves one purpose: Linking manufacturers and those looking to source in China. Once the two parties hook up, there is no need for Alibaba to continue their business relationship.
• A Small Moat – The only real thing that Alibaba has going for it is the network effect – there’s nothing special about their brand or the software that runs the site.

As a long term investor we’ve seen similar hypes and crazy behavior of the markets in 1998 and 1999, when Internet and dot.com stock with no earnings or intrinsic value, went IPO and rose like a rocket. Back then they called it innovation and New Economy.

Ladies and Gentlemen, the rule of money is timeless, it has never changed, it is and will always be about, cashflow, earnings intrinsic value and sustainable business model.

And when the hype is over and reality calls, the prices of these so-called high flyers of today will implode bringing them to their real and realistic valuation.

Until next week.