The Alibaba IPO is the most anticipated of the year and is likely to be the biggest in history, and anyone who can actually buy for the $60 – $66 IPO price (we should find out the exact price next week) should benefit from the inevitable ‘pop’. To figure out where that leaves the rest of us NYU finance professor Aswath Damodaran revisits his valuation of Alibaba and finds the IPO reasonable, with a few important caveats.
Damodaran’s valuation in line with IPO price range
Damodaran is by no means an Alibaba bear. When he first wrote about Alibaba back in May he valued it at $145.6 billion and estimated a share price of $61.46, assuming 2.37 billion shares outstanding. With the additional information released in the last few months he has upped that to $161 billion and a $66 share price (he shows the details of that calculation in the chart below), right in line with the high end of the IPO range. Institutional investors are apparently at least as bullish since Reuters reports that the IPO has already been covered after just a couple of roadshow meetings.
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But hitting the IPO price on the head doesn’t give Damodaran any satisfaction.
“Given what I think about the valuations that emerge from investment banks in general, I am queasy that I am in agreement with their assessments of Alibaba’s value,” writes Damodaran. “It is entirely possible and perhaps likely that both the bankers and I are hopelessly off track […] and repeating a point I have made on prior posts about IPOs, bankers don’t value companies in IPOs; they price them.”
Investors won’t actually own Alibaba
So if his valuation and bankers’ pricing line up, what’s not to like? Damodaran sees two big risks that aren’t reflected in Alibaba’s impressive financial statements. The first, which most people are aware of by now, is that investors aren’t actually becoming owners of the Chinese e-commerce giant, they are buying shares of a variable interest entity (VIE) in the Caymans that in turn owns Alibaba. If the Chinese government ever moves against this creative workaround for its laws against foreign ownership, investors could be out of luck. There’s no particular reason to think that would happen, but even a small chance of having your investment zeroed by a foreign government has to be taken seriously.
Even if China continues to turn a blind eye, shareholders have no say in the company’s operations and will have to trust Jack Ma’s continued leadership, a situation that Damodaran calls a ‘corporate governance nightmare’. Ma has proven himself as an effective CEO, but whether he will be a good steward of shareholder value remains to be seen.