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)
Amazon- 71x
Facebook- 35x
Tencent- 29x
Baidu- 25x
Alibaba- 24x
Google- 19x
EBay- 15x
(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.
IN THE NEXT FEW
MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY
STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES
ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
IF YOU HAVE IDEAS FOR
THE NEW WEBSITE PLEASE COMMENT
ALSO COMMENT ABOUT
WHAT YOU THINK OF THE BLOG AND ANY IMPROVEMENTS YOU WOULD LIKE TO SEE
IF YOU HAVE FRIENDS
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THANK YOU
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