From the value investing professor Damodaran:
As Alibaba's IPO approaches and the road show kicks into high gear, questions about its accounting, value and corporate governance that came up at the time of the filing of its initial prospectus on May 6, 2014, are resurfacing. Alibaba's banking team announced on Friday that their initial pricing for the stock would between $60 and $66 a share, giving the company an estimated equity value of about $155 billion at the pricing midpoint. That would make it the most valuable IPO in history, much higher than the $80 billion at which Facebook's equity was priced at the time of its IPO in 2011 or the $25 billion at which Google priced itself in 2004.
Valuing Alibaba
I valued Alibaba in May 2014, right after their initial prospectus was filed in this post which I titled "Alibaba: A China Story with a profitable ending?"Â In that post, I argued that Alibaba's dominance of the Chinese online retail market provided a foundation for immense value, driven by the size of and the growth in that market and sky-high operating margins. While I will not repeat the specifics of the valuation here, the combination of high revenue growth, sustained margins and relatively low reinvestment, I argued, yielded a value of $145.6 billion for the company and a value per share of approximately $61/share.
Much has happened in the five months since: Alibaba has navigated its way through some accounting quicksand, rumors surfaced of an investment in Snapchat that valued the company at $10 billion though the deal fell apart, and Alibaba updated its prospectus to reflect an additional quarter of information. Since a few months can shift both the numbers and the narrative for a young company, I revalued the company on September 2, 2014 (it was the first valuation of the week in my Fall valuation class) using Alibaba's filing from August 27, 2014. While there are a few tweaks to the valuation, my assessment of the company has changed little. The value of equity that I get, allowing for an initial offering proceeds of $20 billion, is $161 billion, with about half of the increase in value coming from a larger initial offering, and the value per share that I get for the company is about $66. The picture below captures my assumptions, and you can contrast it with my earlier valuation from May, if you are so inclined:
You can download this valuation in spreadsheet form, by clicking here.
In keeping with my posts on narrative and numbers, the key question is whether there is anything that has happened in the last few months that has changed my narrative of Alibaba as a dominant, profitable Chinese online merchandiser and the answer is "not yet." The reason that it is not an emphatic no is that some of the actions taken by Alibaba in the last few months, including a rumored investment in Snapchat, suggest that it has ambitions to become a global retail giant, competing with Amazon (AMZN, Financial) , Google (GOOGL, Financial) and even Facebook (FB, Financial). In the quarters to come, if these actions become more concrete and costly, I will revisit this valuation to see the effects, positive and negative, of this narrative shift.
Continue reading:
http://aswathdamodaran.blogspot.ca/2014/09/alibabas-coming-out-party-valued-right.html
