Chinese e-commerce giant Alibaba Group Holdings Ltd (NYSE:BABA)’s listing on the New York Stock Exchange has become the biggest ever IPO at $25.03 billion. The company had priced its IPO at $68. Strong demand for its stock pushed the stock price up by 38% on the first day of trading. Everyone wanted to be part of the booming Chinese e-commerce industry. So, why would underwriters of the offering stay behind?
Underwriters exercise options in full to buy Alibaba shares
Alibaba said in a press release Monday that gross proceeds for the company and its selling shareholders rose to $25.03 billion after underwriters exercised in full the greenshoe option to buy an additional 48.01 million American depository shares of Alibaba. The Chinese company has a market value of close to $225 billion, more than the combined market value of Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY).
Cantor Fitzgerald analyst Youssef Squali and his colleagues Naved Khan and Kip Paulson have initiated coverage of the stock with a Buy rating and $90 price target. Alibaba Group shares fell 4.63% to $89.54 at 11:12 AM EDT on Monday. Analysts said the largest Chinese e-commerce platform has the potential to dominate the global online retail market over time.
Cantor Fitzgerald said Alibaba’s strong brand, unmatched scale and differentiated pricing model give it an “unfair competitive advantage” over its peers, both in and outside China. The research firm realizes the stock is not cheap, but its stupendous growth and margin profiles should boost its valuation over time. Alibaba dominates 80% of Chinese e-commerce market.
Alibaba one of the most profitable companies in its sector
The company’s revenue has grown at an average of 68% YoY over the past five years to $8.46 billion in FY2014. Meanwhile, EBITDA margins have soared from 21% in 2010 to well over 59% in 2014, making it one of the most profitable companies in the e-commerce space. Squali and his colleagues said Alibaba Group is the “best play” on booming online consumption in China.
Online sales in China have risen 14x in past five years to $297 billion in 2013. Chinese online Sales are expected to double between 2013 and 2016, implying a CAGR of 27%. That’s more than twice the U.S. rate.