In the run-up to the much heralded Alibaba IPO, IG has been offering a grey market on the anticipated value of the e-commerce giant at the close of the first day of trading. This Q & A briefing assesses the IG grey market and prospects for the IPO from IG.com.

Find out more about the launch price of recent IPOs such as Twitter Inc (NYSE:TWTR), Royal Mail PLC (LON:RMG) and TSB Banking Group PLC (LON:TSB):

Alibaba

How has IG’s grey market for the Alibaba IPO performed since its launch in March?

IG: There was some early volatility, up as high as $260 and down to $175 billion. For the past three months our grey market has been trading fairly tightly between $195-205 billion, that is, until the early part of September where it is now at $202-212 billion which suggests both an increase in interest and activity.

What can we say about the performance trend?

IG: The initial wide range of trading reflects the breadth of opinion on the possible size of the IPO, reflecting the degree of uncertainty surrounding Alibaba as a business. After levelling out around the $198 billion mark it appeared that traders had found a comfort level. Its subsequent move upward to $202-212 billion suggests that the recent flurry of media speculation surrounding the IPO date has increased investor appetite for IG’s grey market.

How does the IG valuation compare with the initial estimates?

IG: Our grey market peaked at the top side of the initial estimate of Alibaba’s value, but hasn’t yet looked like going near its lowest extreme. The current level of $202-212 billion firmly places Alibaba in the top half of its initial range, trading at around 54 times its earnings.

Are there any other headline observations to be made about the Alibaba grey market?

IG: At its current value of $202-212 billion, the IG grey market for Alibaba is substantially greater than Facebook’s highly impressive $105 billion IPO and dwarfs Twitter’s $24.48 billion listing.

What is it about the company that makes it so attractive?

IG: In a period where tech companies are often criticised for failing to convert large user bases into profit, Alibaba has bucked the trend by showing clear earning potential. In the last fiscal year, Alibaba nearly tripled its profits to $3.75 billion, and increased its revenue 50%, to $8.45 billion. And since China’s internet penetration is not as high as in other countries, there’s still plenty of room for it to grow.

Plus, the numbers surrounding the company are staggering. In 2013, it saw sales of almost $250 billion across all of its sites, more than Amazon and eBay put together and a 45% increase on the figure for 2012.

How does the IG grey market compare with other current Alibaba valuations?

IG: In July, Alibaba updated its valuation to $130 billion, from an initial valuation of around $117 billion. A recent survey of analysts at Bloomberg valued the company at $154 billion, though that was based on the premise that the company may price its IPO beneath its assessed value to entice investors. The analysts believed that the company’s true value was $198 billion, which is more in line with IG’s grey market.

Are there any other factors behind the high level of optimism around the Alibaba IPO?

IG: US markets have seen increased volatility in recent weeks, but the S&P 500 is still 5% higher for the year, even if the Dow has given up the gains it has made. The Dow Jones and S&P 500 have both hit record highs and the Nasdaq has been trading at levels not seen since 2000. US economic data has been strong for a few months as well, so the environment remains relatively supportive for IPOs.

Is the optimism justified?

IG: Yes and no. Alibaba’s financials are strong, its revenue is comparable to that of Facebook, and profits for the year up to 31 March were around 78% higher. As such, Alibaba arrives on the markets with its earnings ability proven and with clear room for growth. However, the multitude of tech IPOs in the current market and a few unanswered questions surrounding Alibaba’s management and strategy could hold the IPO back while there is always the possibility that the company’s growth could falter, leaving investors disappointed with performance.

Are the indications that Alibaba could be the biggest ever listing?

IG: The current holder of that title is Facebook Inc (NASDAQ:FB), who listed at a value of $105 billion in 2012. It seems possible that Alibaba will take that title when it lists raising up to $20 billion putting it ahead of recent offerings such as Visa Inc (NYSE:V) in 2008 and General Motors Company (NYSE:GM) in 2010, but below that raised by the Agricultural Bank Of China Limited (HKG:1288) in 2010.

Are there any suggestions that the grey market has over-valued Alibaba?

IG: Alibaba would trade at around 54 times its earnings, which places it healthily against comparative sites like Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY). In truth, though, that is because the companies have vastly different business models, which makes western traders attempts to value Alibaba more difficult.  IPOs can overvalue a company, as has arguably happened with a number of IPOs this year, but compared to some that have sold shares Alibaba seems a much more solid proposition.

Are grey markets always accurate?

IG: No, but they can often reach a level that is close to the actual value by the end of the first day of trading. In 2014 so far, grey markets have been 16% away from the exact launch figure. And that figure includes two IPOs that surprised the markets: Weibo Corp (ADR) (NASDAQ:WB) and Just Eat. Weibo dropped their IPO price at the last minute dramatically, which hugely cut the valuation of the company; Just Eat was a surprising success, launch 26% higher than the grey market.

Full list of IG’s grey market launch prices and recent IPOs: http://www.ig.com/uk/ipo-list

How does the IG grey market for Alibaba compare with those the company has conducted for Facebook, Twitter and other big flotations?

IG’s grey market was strong for Facebook, with a $97 billion estimate of its value that was just 8% off of its actual launch price. Twitter and Royal Mail, however, both surprised the markets with their stunning success. As such, IG’s valuation of both companies was well below the actual launch value.

What are the risk factors associated with the Alibaba IPO?

IG: The value of a company by the end of its first day trading on the markets is dependent on a huge variety of factors, including trader sentiment, pricing decisions from management, currency and market forces, or even geopolitical risk. Predicting value means understanding and negotiating these risks, but they can never really be negated. There is also the unexpected – the start of trading in Facebook was delayed on the day by technical problems on the exchange that did much to dampen enthusiasm for the shares.

Recent tech IPOs have been disappointing, what makes this one different?

IG: A combination of staggering figures, strong business model and enticing market.

Alibaba’s IPO presents an opportunity for traders to invest in a company that is proven to be profitable, in a market that is

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