Alibaba – Sheep in Wolves Clothing?


Alibaba is a Chinese e-commerce behemoth that went public last Friday on the NYSE. At the close of trading on its first day, the company was valued at $232 billion (all values in USD). With a value like that, it is more than Facebook, Amazon (its American counterpart) and the timeless Big Blue (IBM).

I don’t only find the value given to the company interesting (I will talk about that later) but also its ownership structure and its composition.

Investors who purchased shares actually bought a portion of a Cayman Island based variable interest entity which has a claim against Alibaba’s earnings. Why? Because the government of China places limits on ownership of local companies. What is a variable interest entity? How are my risks as an investor protected under this structure? Does it increase my risks? How does this ‘entity’ have claims against Alibaba’s earnings?

Alibaba is not one company, as many think, but compromised of different companies which have different functions. One company operates like eBay, another offers B2B commerce while another offers cloud computing services.

Sales of Alibaba are only $7.3B in the last fiscal year[1]. Being worth $232B, it means that shareholders have to pay $31.78 for every dollar of revenue. Under the traditional valuation models based on earning, this is expensive. The price to earnings ratio for the technology NASDAQ index is 24.15.[2] These earning reported are actual, reported earnings. Alibaba is valued at 32 times next year’s earnings. Revenue growth of a minimum 30-35% will be required to meet expectations of investment analyst.

Current market share of 80% will be hard to maintain since there is increased competition for the Chinese consumer.[3] I also wonder about the estimated increase of  its operating margin from 43% to 48%. Over the past 6 quarters, margins have decreased from 51%.

As with other technology IPOs, the share price of Alibaba stock is decreasing, as of Tuesday at noon. Is the sheep coming out of wolves clothing?

The real work for Alibaba management begins now with protecting their market share, increasing their revenue per customer, and expanding margins

What was your reaction to the Alibaba IPO? Did you think about buying in?


1Alibaba Is Overprices and Overhyped – So What Else Is New?


3 Alibaba IPO: Now Comes the Hard Part


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