Alibaba Seen Avoiding Facebook Flop With IPO Below $100 BillionLee Spears and Lulu Yilun Chen
Alibaba Group Holding Ltd. doesn’t want to be the next Facebook Inc. -- at least for its prospective initial public offering. The world’s biggest online retailer is considering a more conservative valuation than what the social-networking company achieved last year, a person familiar with the situation said.
While Alibaba, based in Hangzhou, China, has said it has no timetable for an IPO, analysts are anticipating an offering this year or next. Proceeds from the IPO would be used along with additional cash to buy back stock held by Yahoo! Inc., said the person, who asked not to be named because the plans are private.
Alibaba, which has made Jack Ma a billionaire since he founded the company in 1999, is already in the early stages of a Facebook-like speculative fever over its valuation. With revenue projected to increase about 59 percent this year, echoing Facebook estimates at the time of its IPO, some analysts have said Alibaba could be valued at as much as $100 billion -- right around the $104 billion price tag Facebook fetched in its offering.
While investors may clamor to own a piece of the world’s biggest e-commerce platform, that kind of price could produce disgruntled shareholders and a legacy of ill will if the stock drops -- the same fate that befell Facebook, which went on to lose half of its market value. Investors, who have seen the most-traded U.S.-listed Chinese stocks fall 6.8 percent this year while the Standard & Poor’s 500 Index has rallied 13 percent to a record, also need to be comfortable with the price.
A more reasonable valuation might be about $62.5 billion, the median of eight estimates by investment banks and research firms since February, according to data compiled by Bloomberg. That’s 84 times the estimate of last year’s net income by Morgan Stanley analysts. Facebook’s IPO valued the company at 107 times the previous year’s net income, data compiled by Bloomberg show.
“If investors want to buy into the future, Alibaba’s growth potential and dominant status in China’s e-commerce business is irreplaceable,” said Alex Wang Tingting, a Beijing-based analyst at Internet consulting group iResearch. “Investors will find Alibaba very attractive.”
The company has no timetable for an IPO, Alibaba spokesman John Spelich said by phone. Ma, the executive chairman, said last year the company may go public within five years. Jonathan Lu will replace Ma as chief executive officer this month. It’s not known how much of the company might be listed.
Alibaba doesn’t sell merchandise itself. Instead, it runs platforms including Taobao Marketplace and Tmall.com that connect retail brands with consumers, a cross between Amazon.com Inc. and EBay Inc. The estimated value of goods sold on Alibaba last year, everything from consumer staples to cement and aluminum, was $180 billion, about triple those sold through Amazon, said Eric Qiu, analyst at Guosen Securities Co. in Hong Kong.
Even at the smaller $62.5 billion valuation, Alibaba’s price relative to earnings would well exceed EBay, whose $70.4 billion market value is 27 times last year’s net income, according to data compiled by Bloomberg. Amazon.com is valued at $117 billion -- 86 times this year’s projected earnings, the data show. Amazon recorded a net loss last year.
In a move to strengthen its mobile business, where an increasing number of shoppers place orders, Alibaba last month said it paid $586 million for an 18 percent stake in Sina Corp.’s Weibo unit, which is China’s largest Twitter-like service.
While Alibaba already dominates in China, the company may position its IPO as a bet on gaining even deeper penetration to harness growth, the person said. Online retailing in China more than doubled each year from 2003 to 2011 and is projected to more than triple to $395 billion from 2011 to 2015, according to a McKinsey & Co. report in March. China had 564 million Internet users at the end of 2012, 10 percent more than a year earlier, according to the government-run China Internet Network Information Center.
Alibaba has seen up-close the travails of an overpriced IPO. Its Alibaba.com business-to-business unit went public in 2007 at a multiple of 54 times bankers’ projections of the following year’s earnings before accounting for stock-based compensation, and the stock almost tripled on its debut before trading as much as 72 percent below the IPO price.
While revenue more than tripled during Alibaba.com’s run as a public company, the stock lost value as the benchmark Hang Seng Index plunged to a four-year low in 2008. Five years after the IPO, Alibaba bought minority shareholders out for $2.5 billion, valuing the stock at about 19 times the previous year’s net income, data compiled by Bloomberg show.
Alibaba.com “wasn’t exactly a stock market darling,” said Josef Schuster, founder of Chicago-based IPOX Schuster LLC, which oversees about $1.3 billion. “So they want to be careful, I’m sure.”
Most crucial to a successful IPO will be resisting temptations to let pre-IPO hype boost the price to an unreasonable level.
“If they list, it will be the largest IPO this year,” said Guosen’s Qiu, who said Alibaba is worth about $100 billion.
A $100 billion Alibaba valuation would price the company at 134 times last year’s net income, based on Morgan Stanley estimates.
The $100 billion valuation “doesn’t make sense,” said Schuster. “They need institutions for such a large deal, and institutions are learning from the Facebook experience and aren’t going to pay.”
Morgan Stanley estimates Alibaba’s revenue for the 12 months through December of this year may increase 59 percent from 2012 to $7.48 billion, and another 44 percent in the next year, Morgan Stanley analysts Jordan Monahan and Scott Devitt said in a March 6 research note.
Net income this year at Alibaba may reach $2.18 billion, more than double last year’s $746.3 million, according to the Morgan Stanley note.
A former English teacher, Ma, 48, owns about 7.4 percent of Alibaba Group, according to a September Hong Kong stock exchange filing. Other big investors include DST Global, Silver Lake Management LLC and SoftBank Corp.
Some shareholders will sell portions of their stake while others have told the company they would be buyers in an IPO, the person said.
Alibaba may also take the opposite approach of Facebook in selecting IPO underwriters, the person said. While Morgan Stanley controlled most of the decision-making in the company’s IPO, Alibaba plans to rely on advice from more banks.
The company is talking to exchanges and hasn’t selected its listing venue yet, the person said. Under an agreement with Yahoo, the stock would be listed either in Hong Kong or the U.S., according to a regulatory filing.
Alibaba’s eventual IPO course will likely reflect the desires of management as well as existing shareholders. Members of the board, chaired by Ma, also include Yahoo Executive Vice President Jacqueline Reses and SoftBank President Masayoshi Son.
The company needs money to develop its logistics, financial and cloud-computing businesses, said Liu Shengjun, executive deputy director of China Europe International Business School in Shanghai. It has used debt markets for funding in the past two years.
Alibaba took out $4 billion in loans last year to help take its Hong Kong-listed unit private and buy back $7.1 billion of shares from Yahoo, trimming the U.S. company’s stake to 23 percent on a fully diluted basis. This year, Alibaba agreed to borrow $8 billion from nine banks that will be used to refinance debt and possibly to help fund the buyback of the remaining Yahoo stake, people familiar with the matter said May 2.
“One of the bottlenecks is that management has raised a lot of debt to buy back shares,” Liu said. “The amount of debt is quite substantial.”
The company has begun several initiatives to try to capture the mobile shopping that is taking place through smartphones and tablet devices.
By buying a stake in Weibo, Alibaba gains access to the company’s 46.2 million daily active users -- 75 percent of whom access the service through mobile devices, according to Sina.
Alibaba said in April that it was working with five Chinese handset makers to use its operating system, called AMOS, as it takes on Google Inc. and China-based Tencent Holdings Ltd., which runs a messaging service, for mobile-device users.
In addition, Alibaba is offering a credit-payment service to provide consumer credit to Taobao Marketplace and Tmall.com shoppers. The credit limit is up to 5,000 yuan ($812) per month, according to the company.
Alibaba’s diversifications into social commerce and mobile software may help the company keep a hold on dominance in China’s e-commerce business as it matures. And while the company’s track record may reassure investors, it’s the expectation of future growth that will convince them to pay Alibaba’s asking price, said David Tawil, the co-founder of Maglan Capital LP, a New York-based distressed hedge fund that manages about $50 million.
“They own this marketplace that nobody else owns, that’s growing at a pace that nobody else is growing,” he said. “That’s a great thing, and that’s what they lead with.”