Alibaba Group Holding Ltd., the e-commerce company whose rise has
mirrored China’s economic emergence, became one of the most valuable
companies traded in the U.S. after its shares surged in their New York debut. The shares rose 38 percent to $93.89 apiece yesterday in New York, valuing Alibaba at $231.4 billion. That makes it larger than U.S. rivals Amazon.com Inc. and EBay Inc. combined, as well as Facebook Inc., JPMorgan Chase & Co. and all but 10 companies in the Standard & Poor’s 500 Index.
Alibaba raised $21.8 billion in its initial public offering, more than any company in the U.S.
To break the record, previously held by Visa Inc.’s 2008 IPO, Alibaba lured large investors to the stock: Nearly half the shares were placed with
just 25 funds, people with knowledge of the matter said. It helped that the shares were offered at a compelling discount to other Chinese Internet companies -- a gap that has disappeared after the gains.
“The IPO discount was certainly erased,” said Peter Tuz, who helps manage more than $450 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia.
“Right now people believe it has an incredible future, and the stock is priced accordingly, but actual results are going to start to matter.”
A trader works on the floor of the the New York Stock Exchange on Sept. 19, 2014.... Read More
Ma’s Wealth
Alibaba -- which is profiting from China’s consumer class by dominating the e-commerce industry in the country of 1.36 billion people -- had no shortage of interest in its sale. Founder Jack Ma drew crowds of money managers to meetings held around the world as the company pitched itself to investors this month. As many as 800 people turned up to the first event at New York’s Waldorf Astoria hotel.Ma, who started Alibaba from his Hangzhou apartment in 1999 with $60,000, watched his net worth swell to $26.5 billion as the shares rose. He is China’s richest man according to the Bloomberg Billionaires Index, and will own about 7.8 percent of Alibaba after the IPO, company filings show.
At recent meetings with investors, Alibaba’s founder focused on the company’s ambitions outside of both the e-commerce field and its home base, describing it as an “Internet company that happens to be from China.”
Big Funds
Alibaba made the support of big, long-term investors a priority during the IPO, in an effort to build a shareholder base that will hold onto the shares. That left smaller investors clamoring for the stock, helping push the price up.“In the short run, it’ll outperform the market due to the demand from investors who didn’t have a chance to get into the company at the IPO, and also the IPO underwriters will work to provide stability if needed,” said Josef Schuster, the founder of IPOX Schuster LLC in Chicago. “It has got very strong momentum in the market.”
Alibaba’s ability to close a deal of this size is also owed to an almost non-stop rally in shares in the U.S. -- where about $15 trillion has been added to the value of equities amid three rounds of monetary stimulus from the Federal Reserve, an expanding economy and record profits.
The share sale could break the global record currently held by Agricultural Bank of China Ltd.’s $22.1 billion IPO in 2010 if underwriters issue more shares.
The IPO -- anticipated for years -- hasn’t been achieved without setbacks for Alibaba. The company would have preferred to debut in Hong Kong, though listing rules in the city don’t allow its governance structure.
A small group of insiders at Alibaba control the company’s board, the kind of arrangement that’s permitted in the U.S., where founders of technology companies often maintain control through dual-class shareholdings.
Facebook Lessons
As Alibaba executives met investors this month, they were queried about issues ranging from how the company plans to prevent selling counterfeit objects on its marketplaces to Alibaba’s relationship with its payments affiliate -- Alipay -- which is now effectively controlled by Ma.None of those factors were enough to substantially weaken demand for its shares, with Alibaba’s growth prospects too compelling for many to ignore. The concerns may have kept the company and its advisers from pushing the price too high, like Facebook Inc. did when it debuted in 2012. Facebook’s shares plunged in the months after its IPO before eventually recovering.
“Perhaps learning lessons from Facebook’s IPO, Alibaba’s current pricing range strikes us as conservative, and we do not believe the valuation fully reflects the features that make the wide-moat Alibaba investment story unique,” Morningstar Inc. analyst R.J. Hottovy wrote in a note to clients before the debut. Morningstar has a fair value estimate of $90 per share on the company.
Technology Standout
Alibaba’s profits also make it a standout among technology IPOs. Twitter Inc. raised more than $2 billion last year, and Chinese rival JD.Com Inc. (JD), which has achieved a $40 billion valuation, raised about $2 billion in May -- both without any annual earnings. Alibaba by comparison turns about half of its sales into income.At its IPO price of $68 a share, Alibaba was valued at 29 times expected earnings for the year through March -- below multiples fetched by Chinese and U.S. rivals including Tencent Holdings Ltd., Baidu Inc., and Amazon.com. After the trading gains the shares are valued at closer to 40 times expected earnings, above both Tencent and Baidu, and more than the median fetched by Chinese Internet and E-commerce companies listed in New York or Hong Kong, data compiled by Bloomberg show.
“This valuation is not fundamentally defensible,” said Max Wolff, the New York-based chief economist at Manhattan Venture Partners. “This is now clearly and significantly overbought and overpriced.”
Yahoo Windfall
Alibaba itself will raise about $8.4 billion from the sale, while another $867 million of the proceeds will go to Ma, IPO filings show.Yahoo, which poured about $1 billion into Alibaba nine years ago, planned to sell 121.7 million of its shares in the IPO, the filings show, raising about $8.3 billion at the offering price. That will trim its stake to 16.3 percent from 22.4 percent.
Japan’s SoftBank Corp., Alibaba’s largest shareholder, didn’t plan to sell shares and will have a 32.4 percent stake after the offering, according to the prospectus.
China Growth
Alibaba provides various marketplaces for buyers and sellers as well as services that help them conduct their businesses. Taobao Marketplace, started in 2003, enables millions of individuals and small businesses to sell products. Tmall.com provides a virtual shopping mall, with retailers and brands offering products, and Juhuasuan operates a flash-sales model.Mainland Internet users have grown to 632 million and could exceed 850 million by 2015, according to government data. Alibaba has been seen as a proxy for this growth with its 279 million active buyers in the year through June, according to its prospectus. This scale has enabled the company to generate revenue of $8.46 billion in the year through March.
Profit in the first quarter surged as advertisers boosted spending on the Tmall and Taobao platforms. Net income almost tripled to $1.99 billion, or 84 cents a share, in the three months ended June 30.
“This isn’t a situation where you’d see a high-growth company fall down to earth -- it’s a very sustainable business model,” said Eric Brock, a portfolio manager at Clough Capital Partners, which oversees more than $4.5 billion in assets including the Clough China Fund.
China Risk
China also raises risks for investors. Like many Chinese companies, Alibaba will rely on a legal structure known as a variable interest entity, or VIE, required by the Chinese government for foreign ownership of certain industries, including Internet companies. While Alibaba gets most of its revenue from wholly foreign-owned enterprises, if China revokes its VIE license, U.S. investors could be affected, filings show.“I remain concerned about the dangers that these structures pose,” Senator Robert Casey, a Democrat from Pennsylvania, said in a letter to the U.S. Securities and Exchange Commission.
Still, that didn’t stop individual investors in the U.S. from snapping up Alibaba’s shares. At TD Ameritrade Holding Corp., retail investors placed more pre-open orders for Alibaba than for Facebook and Twitter’s offerings, for example.
“Our thought was that BABA might not be as popular as Twitter and Facebook because not many Americans have used Alibaba, but it’s a fascinating company for the U.S. retail investor,” said Joe “JJ” Kinahan, chief strategist at TD Ameritrade, referring to the company’s ticker. “Retail investors are trusting it more because there has been so much coverage of it and it’s got a lot of institutional interest.”
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