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Irrationally Exuberant: Is Alibaba.com Really Worth US$7.8bn?
By Paul Midler | October 17, 2007
Something is bothering me about Alibaba’s IPO and related market valuation. In case you haven’t heard, the company is looking to raise as much as $1.3bn in an initial public offering, making this the largest ever IPO for a tech company based in China. The IPO is going to give the company a valuation approximating $7.8bn. Believe it or not, some are saying that this value is low.
Alibaba.com is a website that provides information on China manufacturers (Yahoo! owns a 39% stake). The website serves as a kind of directory. Consider it a Yellow Page for prospective importers. Those who say that website is a great business model emphasize the company’s first-mover advantage. Many also get excited about this being a “B2B play” - the phrase is so “2000”, but never mind that part. My lack of enthusiasm for the IPO has more to do with many uninspired experiences with the company’s website. To be frank, I just don’t get it. Aren’t the best China supplier relationships those where the supplier and buyer are known to each other, where the two have an on-going work relationship? Established players have little use for the website after the relationship is in play, and it’s hard to imagine that, for example, Mattel, ever used Alibaba.com (its supplier relationships predate the Internet).
If the website has any value at all, it’s in enabling fledgling factories to find would-be buyers. If you believe there is value in such a proposition, let’s reference all of those financial analysts reports that suggest the industry is rapidly consolidating. It would be one thing if factories were like single people - dating websites enjoy a steady stream of new single customers - but manufacturing is not the same. In the long run (or sooner?), all capable manufacturers are known to the market. The website works best in a world with murky market data. We are heading away from that world, not towards it. There are already websites that allow companies to list information for free and Chinese are using these sites with greater frequency.
I have no doubt that the IPO will come out strong. It’s going to get lots of attention because it’s both a tech play, and it’s a China play – call it “hype squared”. Not sure about Alibaba Group’s other businesses – it’s PayPal-style, or eBay-style, business models. It’s just that Alibaba.com as a business lacks what you want to see in an Internet offering. Just take a look at these five-year graphs pulled from Alexa. In terms of page views, as well as the site’s rank, both are down to where they were when Alibaba.com just started to take off in 2003. The company may be a rocket ship, but it’s one pointing in the wrong direction.
Topics: China |
October 23rd, 2007 at 2:23 pm
At least eBay collects a percenage from the buyer/seller transaction…
October 23rd, 2007 at 6:13 pm
Definitely not worth that much. Why not attach a high multiple (like 30) to advertising income plus any (if there are) ongoing registration fees for Chinese manufacturers (after all expenses)?
Probably would be lucky to get to a double digit million dollar valuation doing that…
October 24th, 2007 at 6:16 pm
I think this glosses over how much traders change factories. Western traders for the most part usually have several potential suppliers and go with the cheapest and work on the quality as they go.
In addition provinces often change the tax law to encourage (or now because of pollution) discourage certain businesses. The low skilled manufacturing industries such as textiles then move around to the best tax and low cost labor location. I think this moving around provides a use for Alibaba. In addition,other than trade fairs, most suppliers recieve new clients from their websites. Ali baba is the conduit for this.
Ali baba still has draw, even if conventional logic says it shouldn’t.
have fun,
SimoN:)
November 2nd, 2007 at 4:50 am
Let me start by saying, 1. a great blog. 2. the market is a humbling game. You have to assume all other market participants are smarter than you and have more information than you, and work your DD (due diligence) from there. Not the other way around.
Given your comments, I take it that you haven’t read Alibaba.com’s prospectus? Alexa’s methodology is essentially flaw to a point that it’s useless — I won’t get into it but if you are interested you can read more. Plug google.com and amazon.com in and see their traffic pattern in the past 12 to 18 months. Were they good shorts in that timeframe?
Alibaba.com’s earning has been growing at least 100% year-to-year since 2004, and its 1H 2007 pre-tax earning stood at RMB400 million. That’s better than Baidu (BIDU), and BIDU’s market cap is at US$13 billion.
If we have a time machine to go back to when “irrational exuberance” was first uttered in November 1996, two words: STRONG BUY. It’s just the basic contrarian principle — if the market (or a stock) is strong and many market participants, especially prominent ones, are bearish, it’s a strong bullish sign — there are more potential future buyers.
November 2nd, 2007 at 8:09 am
JXie - I’m glad that someone made a point of suggesting that Alexa’s data is not all that accurate. It still doesn’t mean that the Alibaba proposition is high. Ask those involved in import/export, and they would tell you that it’s not a great tool for finding factories in a large and fragmented market. There are too many agents (some guess 80-90% are wannabes, and I’m not going to disagree with that estimate for categories like garments).
I still think that Alibaba.com is like the Yellow Pages. Companies will advertise because they feel that they have to. In some small factory towns I have visited, I see a massive advert on the street for Alibaba.com, and my first thought was “do they really think that a lot of importers are passing by?” Then I realize the billboards aren’t for me - they are a reminder to the factories. My main criticism is that Alibaba.com is a LOWER VALUE PROPOSITION TO THE IMPORTER than most realize. And that should be taken into account in any valuation, because that reality is likely to catch up wtih any stock price. Companies will advertise, and that’s great for business. But for an importer or agent, the value proposition just isn’t there.
Anyway, consider that at something like 95x-105x P/E ratio, Alibaba’s IPO is coming out more expensive than Google (which is now trading around 50x).
A friend of mine sent me a note saying that he’s flying into Hong Kong especially to place orders for Alibaba. When I gave him all my criticisms, he said “I’m not going to get burned. I’ll sell the thing within a couple of days”. Let’s hope there aren’t too many like this.
November 2nd, 2007 at 8:28 am
Simon - No one wants to work with a factory that’s just 12 months old (high risk), and there will be fewer “established entities” as we move forward. Consider also reports by the JP Morgan or Merrill Lynch that say China manufacturing is facing consolidation as a result of “crackdowns” on quality. If that is the case, then there will be fewer factories from which revenue can be generated. Unless each is willing to pay more…
When all of the players are essentially known to the market, what’s the value?
Consider which advertisements are the largest in the Yellow Pages. Advertisements for exterminators and personal injury lawyers and 24-hour dentitsts. These are “impulse services”. You call them up at the last minute, and companies place full-page ads because they know a prospective customer is likely to go to the first ad that they see. Alibaba is NOT looking for “impulse customer”. The best supplier relationships are well established. The importer has done his homework, and the supplier itself has been around for a while and is known to those in the industry.
Alibaba.com was a very important tool when the factories were hidden. As these companies are less and less hidden, the value proposition decreases.
If an analyst could prove that there are more factories born every day, fine, that might add to a positive outlook. Or if an analyst could somehow explain why factories will be wiling to double the amount they spend on Alibaba, that would help. What appears to be the case is that more agents and wannabes are flocking to Alibaba and this adds to one of the website’s biggest shortcomings - that it can’t prevent schemers and wannabes from jumping online and pretending that they are factories. This is not eBay, a C2C business model. This is supposed to be a B2B model populated by legitimate players. It’s proving to be a platform for the exchange of goods between questionable participants. Those I know in trade do not rely on Alibaba.com, and that’s probably the biggest reason why I suspect a problem with the business model.
November 2nd, 2007 at 2:47 pm
Here is the link to its prospectus: http://main.ednews.hk/listedco/listconews/sehk/20071023/LTN20071023003.HTM.
I guess time will tell if you are right or wrong. Here is the question: why should Alibaba.com limit their service offering to only yellow page-like service?
Or why should Yahoo in 1996 only limit to bookmark-like directory service, or Google in 2001 only limit to vanilla Internet searching, or MySpace in 2003 only limit to linking people together. In the whole Internet revolution (or in the prior media revolutions such as newspaper, radio, TV, cable, etc.), once you build a platform and have people’s attention, you can monetize it in so many different ways.
Oh, the 2008 P/E of Alibaba.com is estimated at 55. That puts its forward PEG way below 1.
November 2nd, 2007 at 3:03 pm
You’re taking a P/E of 2008, and I’m talking about 2007 (a more reliable figure). The information is coming from here…
http://www.forbes.com/2007/10/23/alibaba-ipo-pricing-markets-equity-cx_jc_1023markets1.html
You can’t mention Alibaba.com with Yahoo or MySpace in the same breath. These are general consumer sites that provide a broad range of freebie services to the general public. Alibaba.com is supposed to be a B2B platform. And anyway, just look at what’s happening to Yahoo. They can’t fire executives fast enough.
Again, I think it’s possible for Alibaba.com to be a great stock to play with in the short-term. And the Alibaba.com holding may be a great business for the Alibaba Group. But that doesn’t mean that Alibaba.com is a great proposition for importer/exporters who are looking for a particular edge in business.
The thing that strikes me is that most of the people completely sold on Alibaba.com have never actually used the website. Ask those who are in the business of conducting frequent supplier searches, and they will tell you that there are better ways to find China suppliers. That’s a worrisome thing to hear if you’re counting on Alibaba’s stock over the long term.
November 3rd, 2007 at 10:05 am
Paul, don’t think you fully understood the gist of my writing, allow me to explain.
I started using Yahoo when its server was still hosted in Netscape, circa mid-1994. In the summer of 1996, a few months after its IPO, Yahoo went as low as roughly $100 million market cap-wise. I took a bearish stand on it because I couldn’t see how much money a directory-type service can make — like I said the market is a humbling game — and watched in horror it went as high as $120 billion. Granted, even without the benefit of knowing an upcoming bear market, Yahoo probably went to the overvalued territory beyond maybe $10 to $50 billion. But even in its early rising, based on the backward conventional P/E metric, it was always an expensive company. Actually it became even expensive measured by forward PEG roughly when it crossed $1 billion, but the forward E was always underestimated.
Now, if you will, stand back and think for yourself like Jack Ma, whom BTW is considered one of the most admired Chinese business chiefs among those who have met him and worked for/with him, and his lieutenants. You just IPO’d and have some $1 billion in your war chest, what would you do next? Correct me if I am wrong — you’ve viewed Alibaba.com from a position of adding value to importers. How about viewing it from some importers who may not want to pay for your services, or more importantly from what those billboards you saw catering to? Can Alibaba.com help them more beyond what have been offered already? Like accounting, financing, certificating, etc.?
Don’t get me wrong, I can be totally wrong. Once you have your real money in this game, you learn quickly not to marry to an opinion and not argue with the market.
February 28th, 2008 at 5:42 am
[…] in which I questioned Alibaba’s initial public offering and the valuation placed on the stock (“Is Alibaba Really Worth $7.8 Billion?”). Jack had also commented, others joined in with their own analysis, and investors have since come […]