Searching for Alibaba's Value

 | Aug 22, 2014 | 11:44 AM EDT
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In a few weeks, we will see Alibaba go on its IPO roadshow and present its story of how it's going to grow in the coming years. Dutiful sell-side analysts will then go back to their desks and make up models of Alibaba's future growth and come back with their price targets for the stock.

Using the information in Alibaba's F-1 filing as well as other industry data put out by third-party firms that are estimating Alibaba's market share in different businesses, I have come up with my own estimates.

Alibaba now runs on a fiscal year that ends on March 31. However, I'm going to give my estimates for the calendar year. For all of 2014, I'm expecting Alibaba Group will generate $12.8 billion in revenue. This amount will likely increase to $17.8 billion in 2015 and $23.1 billion in 2016.

And then there's the old Alipay unit. Recall that this was the financial part of Alibaba Group, which was ripped out of the group in 2011, causing a lot of upset in the U.S. among Yahoo! investors. At the time, David Einhorn of Greenlight Capital, who had been long Yahoo! (YHOO), immediately sold his shares and told his investors that this "wasn't what we signed up for."

Alipay continues to grow and prosper. Jack Ma now owns 50% of it. Alibaba still owns 37.5% of it. How is it doing? We don't know because it's not formally part of the initial public offering. However, we can make some estimates again based on third-party data. My best guess for Alipay is that it will pull in $4.12 billion in revenues this year, $5.6 billion next year, and $6.6 billion in 2016.

So, Alibaba basically owns a little more than a third of this revenue stream and should be rewarded accordingly in terms of its own market cap. Now, the question is what will these likely revenue streams be worth when the company makes its initial public offering.

Twitter (TWTR) gets a trailing price-to-sales multiple of 28x. Facebook (FB) enjoys one of 20x. However, Chinese Internet stocks are priced quite richly: Baidu (BIDU) has a trailing multiple of 12x and Tencent has one of 14x.

I suspect that Alibaba will initially get a trailing price-to-sales multiple of 15x -- a slight premium to Tencent. However, they're growing at roughly the same rates. Maybe it will get bid up post-IPO to something closer to Facebook, but I suspect it will come back down to 15x.

This means is that Alibaba will probably trade for most of this year around the $215 billion market cap range. By next year, I see it going to $280 billion. By 2016, it could see a market cap of $340 billion.

Today, Yahoo!'s stock is worth close to $48 per share -- even if you assume that it pays all the taxes on its Asian stakes. Assuming the company can work out a tax-efficient deal, the shares deserve to trade closer to $60 per share.

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