Meet Jack Ma, the funniest billionaire in the world.
The man behind Alibaba, the Chinese Internet giant, had institutional investors rolling in the aisles in New York earlier this week when he reminisced about visiting the United States 15 years ago to unsuccessfully plead for $2-million (U.S.) from venture capitalists. Now, he added, he's back to ask for just a little bit more.
Cue the laughter. As Mr. Ma's audience knew, Alibaba Group Holding Ltd.'s initial public offering is on track to raise more than $21-billion next week, and could wind up as the biggest IPO in history. And the funniest part of it all? Even at that price, Alibaba may be undervalued.
Mr. Ma's creation offers investors a chance to cash in on the rising affluence of Chinese consumers. Unlike many recent Internet IPOs, a buyer doesn't have to accept outlandish growth estimates, or stratospheric valuations, to conclude that the shares offer decent value at their current pricing.
Alibaba, which was founded in Mr. Ma's apartment in 1999, dominates Chinese e-commerce, with online malls and trading platforms that allow businesses and consumers to buy and sell from each other – to the tune of more than $296-billion last year. It's like an Asian mash-up of eBay, Google and Amazon, but with the key difference that it doesn't actually sell or deliver anything itself; rather, it runs the storefront and generates most of its revenue through advertising.
Alibaba has been growing at a breakneck pace and seems likely to continue doing so for quite a while, considering that more than half of China's population has yet to obtain Internet access. In the second quarter, its transaction volume soared 45 per cent from the same period a year before, and it signed up 24 million new active buyers.
At the moment, Alibaba's revenue amounts to less than 3 per cent of the value of transactions it facilitates. But because Alibaba isn't a retailer, it doesn't have to own its own warehouses, or buy inventory, or shoulder any of the other overhead that goes along with running a store.
Result: Its income from operations amounts to nearly half the money it takes in. By comparison to Amazon, which doesn't make money, Alibaba looks like a veritable cash machine.
Earlier this month, Aswath Damodaran, a professor of finance at New York University, valued the company based on conservative assumptions – conservative, that is, in the light of Alibaba's growth to this point.
Prof. Damodaran assumed the Chinese company will grow its revenue over the next five years at a rate of 25 per cent a year and that its pretax operating margin declines to 40 per cent. He concluded Alibaba was worth about $161-billion, which would imply that the shares it is selling have a value of about $66 each.
Two days after Prof. Damodaran arrived at his numbers, the company priced itself at nearly exactly the same levels, suggesting that, at least at this stage, it's not asking investors to stretch for any inflated valuation. At Alibaba's own estimate of $155-billion, its shares would be trading for about 41 times its earnings in the most recent fiscal year, about half of Facebook's price-to-earnings ratio.
Many believe that Alibaba will boost its offering price in the days ahead as investors contemplate its growth prospects. In China, for instance, it's beginning to offer bank-like services, allowing users to deposit money, take out loans and make investments. Outside China there are equally alluring prospects. It recently opened an online mall aimed at U.S. shoppers and could eventually tackle other markets.
But there is one big caveat for would-be investors: the company's shambolic governance structure. Strictly speaking, investors aren't buying Alibaba itself, but rather shares in a Cayman Island shell entity that controls Alibaba.
On top of that, Mr. Ma controls everything through an odd partnership structure that allows an inner group of 30 to dominate the company's board. Given Mr. Ma's penchant for off-the-cuff decision making – he's banged heads in the past with Yahoo, one of his early investors – that's reason for concern.
All of which suggests investors better enjoy Mr. Ma's sense of humour. With no way to rein in management, shareholders could still wind up being the butt of the joke.
Ian McGugan