By Andrea Ricketti
The Alibaba (BABA) IPO ended the day with an impressive 38 percent to $93.89, which gave the company a market cap of $231 billion on volume of a staggering 271 million. The IPO was so massive that it overshadowed other news-leading items such as: the failed vote for independence in Scotland, the CEO of Oracle stepping down and the debut of Apple’s new iPhone.
After such a monumental day, the valuation on BABA stock looks pricey. The price-to-earnings multiple, which is based on fiscal 2014 earnings, is about 62 times. However, factoring in the growth rate makes things look more feasible. For example, if net income increases at just half the rate of the past year, Alibaba would be trading at a forward price-to-earnings ratio of about 33.
Even though the company had a successful IPO, the true test for their stock will be within the next year. The company is in the midst of a massive investment push in mergers and acquisitions, venture deals and infrastructure. All of these are vastly important for growth, but they could all weigh on margins.
Alibaba faces the headwinds of competition from players like JD.com and Tencent. Both of these companies are gunning after a bigger piece of China’s e-commerce pie, and they have valuable platforms they can use to snap up more market share. Tencent’s WeChat system is the largest threat to Alibaba’s success. While it is social media, it has more than 400 million users and already has proven to be a viable e-commerce platform for consumers.
Another wildcard that can affect Alibaba’s success is China’s economy. For the past few months, internal growth has been slowing in China, which is not encouraging. Broadly speaking though, the Alibaba deal is a good sign for the IPO market. There is clearly interest in growth companies, so expect to see no slowdown in offerings for the rest of the year.
In relation to other IPOs, Alibaba dwarfed Facebook Inc.’s IPO, which was the latest comparable technology IPO. When the world’s largest social network went public two years ago it raised $16 billion, giving it a market value of $104 billion. Facebook was valued at nearly $200 billion entering Friday. If this pattern happened for Alibaba, they would be in good shape.
Although it is relatively unknown in the States, Alibaba hopes to become a household name like Google soon. Unlike many other tech companies that go public with little profit, Aliababa was already successful by financial standards. The company is hoping to use its prior success to propel them further this upcoming year.