One of the most awaited IPOs in history is also its biggest: Alibaba Group is set to IPO on the NYSE after a tumultuous and eagerly anticipated run-up, which has already benefited one of its biggest investors, Yahoo (YHOO). Thanks to demand for the stock, YHOO has gained 23% in recent weeks, and began trading higher on a bearish morning after rumors that BABA would set its stock price even higher amidst fierce demand for its shares.
The Alibaba IPO is undoubtedly making a few dozen junior analysts work extra long nights and weekends at the six banks underwriting the deal. While these analysts are spending a lot of their time on pitch books, prospectuses, presentations, and other stacks of paper few people (if any) will ever read, they all point to one very big question: exactly how much is BABA’s stock worth?
There is no right question to this answer, which is why stocks fluctuate in price, but there are some data points that market makers and investors will use to price these shares.
To get these data points, we need to read through Alibaba’s F-1, which was filed with the SEC on May 6th. The entire document is extremely long (over 250 pages), and includes a great deal of financial data of lesser importance. For investors, the key data points are the company’s revenue, its cost of revenue, its total expenses, and its income from operations.
Those numbers are staggering. In the year ending March 2013, the company had $5.5b in total revenues, with 85% coming from China. Operating income was $1.7b, allowing for a 30% operating margin. Net income to shareholders was $1.35b, with diluted EPS to shareholders of 57c for the year.
For the nine months ending December 31st, 2013, BABA saw revenues grow 57% to $6.5b and EPS exploded sixfold to 1.23 on much lower costs. The cost cutting was across the board, with cost of revenue falling relative to revenues and a payment to Yahoo causing inflated costs in 2012 that BABA shareholders no longer need to worry about.
Originally, BABA was expected to price its IPO between $60 and $66. Annualizing the last nine months’ EPS of $1.23 to $1.64, we get a valuation of 40 P/E. The new IPO price, if it’s at 69, will yield a valuation of 42.
These numbers immediately tell us why demand for BABA stock is so fierce. Slower-growing American stocks that have a smaller market presence in a slower-growing market have much higher P/Es. AMZN has a P/E of 870. FB is 84. TWTR and EBAY are operating at a loss, so they have no P/E. Only GOOGL has a lower P/E in the internet tech space, at 29.6, but its revenue growth is a fraction of what is seen at BABA.
With any comparison, it seems that BABA is extremely cheap and priced for modest growth, not the hypergrowth that it is seeing. Competitive issues exist and the legal and accounting worries of investing in a Chinese company remain. But even with these, BABA is priced for significantly less growth than it has already seen, so it’s no wonder demand for equity in the company is strong. It remains to be seen if the market over-exaggerates the company’s value and drives the stock price too high after the IPO, but whether or not that happens, a massive payday is coming for those who got in on the ground floor with this name.