Remember December 2011, when the market capitalization of Groupon (annual revenue: $1.6 billion) was briefly bigger than that of the supermarket chain Carrefour ($109 billion in sales)?
Or May 2008, when Petrobras and Gazprom were worth more than Royal Dutch Shell and Microsoft?
In March 2000, Nokia had a higher valuation than Wal-Mart, while WorldCom -- soon thereafter to be bankrupt -- was bigger than Johnson & Johnson. You could have bought all the equity in Citigroup, JPMorgan, Morgan Stanley, Bank of America, and Wells Fargo (total assets: $2.6 trillion) for about as much as you'd have paid for Cisco Systems ($22 billion in assets).
Those are reasons to add a pinch of salt to estimates that Alibaba's payments affiliate Ant Financial could be worth more than Goldman Sachs.
The company, controlled by Alibaba's founder, Jack Ma, might have a market capitalization of $75 billion, according to Elinor Leung, the head of telecom and internet research at CLSA in Hong Kong. That's not just the view of a single analyst: Ant was valued at $60 billion in June, when it raised $4.5 billion from early-stage investors, people familiar with the matter said at the time.
Until the closely held business publishes some more financial data ahead of its planned initial public offering, it's hard to say whether that's a reasonable price. But there's enough information around to say that it's at least coming in at a generous valuation.
Ant has paid royalty fees to Alibaba roughly equivalent to 37.5 percent of its pretax profits in each of the last two fiscal years, in accordance with a 2014 agreement between the two businesses. These payments amounted to 1.67 billion yuan ($250 million) in 2015 and 1.12 billion yuan last year, according to Alibaba's most recent annual report.
Subtract taxes at the 10 percent rate available to favored software businesses in China, and you're looking at net income in the region of 3.8 billion yuan in 2015 and 2.5 billion yuan last fiscal year. At a $75 billion valuation, Ant would be worth about 186 times last year's earnings, compared to just under 12 at Goldman.
That's not quite as outrageous as it may sound, because the snapshot provided by historical price-earnings ratios isn't always a great way of valuing fast-growing tech companies. Amazon.com trades at 194 times last year's earnings. Google shares debuted on a ratio of 77 in 2004, rose as high as 172 within 18 months, and these days sit on an almost pedestrian 30-times multiple.
Ant Financial certainly has the scale to push harder on earnings once it's reached the sort of user base it's aiming for. Its Alipay unit handled 153 million transactions a day in the first quarter of this year, compared with 180 million at Mastercard and 260 million at Visa in the preceding quarter, according to a company presentation.
Yu'e Bao, a service where customers can store their funds to make transactions easier, had 760 billion yuan in assets under management at the end of March. The whole group has been increasing its user base by 39 percent a year, a rate which if repeated would enable the business to grow from 451 million users at present to its target of 2 billion as soon as 2020.
Still, it's playing in a fiercely competitive market against the likes of Tencent's WeChat Pay and a swarm of peer-to-peer lenders. Large data and payment processors such as Visa, MasterCard and PayPal have a median net income margin of about 8.4 percent, compared with 18 percent at brokerages and investment banks , according to data compiled by Bloomberg.
Ant will have its work cut out to justify the valuation and growth rate it promises. In its first eight years of making profits, Amazon's annual pretax earnings fell just once. That royalty fee income Ant pays to Alibaba fell by one-third last year.
Right now, Jack Ma can do no wrong. Leaders of the Group of 20 nations beat a path to his hometown of Hangzhou for their meeting earlier this month, and he's just been named a special advisor to the UN on trade. But companies soaring on generous valuations often find themselves falling to earth. At $75 billion, Ant is going to have to pedal hard to stay aloft.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Ant may not qualify for that concessional 10 percent tax rate, but this assumption gives it the most conservative valuation. At the standard rate of 25 percent, its P/E ratio would be about 223.
Based on companies with more than $1 billion in trailing 12-month revenues.
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