Alibaba files for IPO

The long-awaited news hit markets last night – Chinese internet giant Alibaba has filed documents for its IPO, marking the beginning of the final step on the road to becoming a publicly listed company.

Initial estimates abound, but the current consensus is for a valuation somewhere in the region of $115-245 billion, which is quite the spread all things considered. Tech companies trading on high earnings multiples have been hit hard lately, but those for Alibaba look more reasonable, especially when potential growth rates in China are taken into account.

The table below indicates the multiples at which Alibaba would trade at both ends of the spectrum, based on the most recent full-year revenue and earnings figures of $5.6 billion and $1.4 billion respectively:

Valuation

Revenue multiple

Earnings multiple

$115 billion

20.5 82.14

$245 billion

43.75 175

 

Record-breaking IPO?

The flotation would make it one of the biggest IPOs in history, dwarfing that of Twitter and potentially putting Facebook in the shade as well. IG’s grey market has seen significant action now that the filing has been made, but in contrast to the wide range above our clients actually expect an IPO range of $198 billion to $208 billion, far tighter than the currently estimated number, and suggesting a midpoint of $203 billion or 36.25 times revenue and 145 times earnings, for the valuation at the end of the first day of trading.

Learning from previous flotations

It’s instructive to compare this grey market to previous ones. For Twitter, our grey market suggested that the share price would end the day at $43.60, valuing the company at $23.75 billion. The closing figure on the first day was $44.90, or a valuation of $24.46 billion, only a 3% premium to the IG grey market.

The pre-float hype surrounding IPOs such as King.com, Pets at Home and Poundland has since dissipated, a reflection of investor dismay with the general poor performance. For Alibaba, however, there is a much more optimistic outlook. Not only does it have a track record of excellent growth in China, a country where internet penetration is much lower than in the US, providing opportunity for yet more sales growth, but it has a much wider operating margin than Facebook and Google, at 50% versus 37% and 28% for these other firms.

No IPO is without its risks, and there are a number of firms snapping at Alibaba’s heels. However, this might, for once, be an IPO that is actually worth all the fanfare.

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