The stock market has been acting much like a roller coaster this past summer with the Dow gaining a little over 200 points since the last time I posted June 29th. With that said there has been a large over 600 point sell off in late July but stocks have since bounced back, and continue to climb ever higher. Investors have had a lot to digest this summer and early fall, with tensions with Russia heating up again in light of the new sanctions, the winding down of the war in Gaza, and America’s new involvement in Iraq and ISIS. Even Scotland’s new referendum to secede from Britain has had its effect on the market. But one thing has definitely kept Wall Street’s eye throughout the summer and for months before that, the most anticipated and largest IPO of all time, the Chinese ecommerce giant Alibaba.
Any person who has even glanced at the financial news over the last several months has heard of Alibaba. Jack Ma’s internet startup that has become one of the largest ecommerce giants in China and hence forth the world and now is having its market debut on the New York Stock Exchange. For those of you unfamiliar with it Alibaba is China’s equivalent of Amazon, EBay and PayPal rolled into one, the primary difference is Alibaba is larger than both Amazon and EBay combined with over 279 million active buyers and 8.5 million active sellers in the first 6 months of 2014.
Everybody knows that China has the potential to become the largest consumer market in the world but American companies have been struggling for years to break into the heavily regulated market. Chinese companies such as Baidu, Tencent Holdings and off course Alibaba have taken advantage of Wall Street’s thirst to get into the Chinese consumer market by having there IPO’s in New York as opposed to Hong Kong. But honestly, I know you do not particularly care about that what you want to know is if Alibaba is a good addition to your stock portfolio and how will the stock perform.
Obviously I am not the first one to write about Alibaba and I am sure I will not be the last but with the IPO only a week away I believe it is a good time to give my opinion on this new internet giant.
The first thing investors need to know about Alibaba and its IPO is that this is not a Chinese version of the Facebook or Google IPO. Those companies went public as mere startups and grew into internet giants and corporate empires. Alibaba is already established, the company is unlikely to double its stock price on the first day the way Twitter nearly did when it went public last year.
With that said the hype around Alibaba has been intense, and it has been confirmed that nearly 40 institutional investors have already requested up to $1 billion in Alibaba stock each. With this hype it is unlikely that retail investors would be able to get their hands on the stock at anywhere near the initial price of $60-66. So the billion dollar question is whether Alibaba stock is priced low enough to be good buy and at what price will the stock become too expensive in terms of evaluation.
To answer that question we must go through Alibaba’s financials and see if the numbers add up. Alibaba reported profit of $2.3 billion in the first 6 months of 2014 and revenue of $8.5 billion last year, those numbers are growing considering Alibaba’s profit jumped 43% in just 1 year. Estimates for 2015 show that profit for that full year will jump to $7 billion and that revenue will continue to climb 30% per year which would mean that by 2016 Alibaba would be producing about $20 billion in revenue.
That kind of earnings growth would put Alibaba ahead of American internet giants like Amazon and Google. But these numbers are also estimates and if investors know anything it is that estimating anything on Wall Street is futile. With that said however these are the most accurate numbers investors have to go by in order to make a decision about whether or not to invest in Alibaba so lets make the best of it.
If these numbers are accurate Alibaba will go public at a P/E ratio of about 24x 2015 expected earnings. Now that is not bad at all, I would not call that cheap per say but when compared to other companies in the industry it exceedingly average. (Below is a chart created by the Wall Street Journal comparing Alibaba’s evaluation to other American and Chinese internet companies)
(2015 P/E Ratios for estimated 2015 net income)
As you see in the chart above Alibaba is not exactly cheap, but with earnings potential being almost limitless considering the fact China might become the largest consumer market in the world by far, it is possible that Alibaba warrants the price tag given to it at its IPO. Unfortunately like I said before it is unlikely that retail investors will be able to the stock at anywhere near $60-66 a share but is the stock stays below $80 I would still consider it a good investment.
To summarize Alibaba’s $24 billion IPO could be an amazing opportunity to get in on the growing Chinese consumer market. Even with the potential problems in the future such as increased competition from other Chinese and American internet companies as well as the problems of breaking into the U.S market the opportunity Alibaba presents is unprecedented. My recommendation would be to make room in your portfolio for this stock immediately so that on Friday when it goes public you could one of the first to buy.
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