I have been listening and watching and reading for days now about how bad Alibaba (BABA) could be for the markets. I hear it is overvalued. I hear it is too hot. I hear that it will be too expensive, that it has opaque ownership and that this initial public offering is a sign of a top.
So I thought I would put this little primer of salient facts together about why, if you hate Facebook (FB), Twitter (TWTR), LinkedIn (LNKD), Google (GOOGL), Amazon (AMZN), VIPshops (VIPS) and JD.com (JD) then you should love -- not hate -- but love Alibaba. So, without further ado, let me give you all of the reasons you don't have to own it, don't have to get in on the deal -- and can go on your merry way without it.
1. First objection: This company, if it is valued at $80 a share, fully $10 above an already-jacked-up $60 initial-low-end starting point, is ridiculously overvalued. Actually, if you stack it up against almost every company I have mentioned above, you would find that it is cheap at $80 per share, maybe even ridiculously cheap vs. every one of those companies mentioned above, given its growth rate and profitability. I think if it can earn $2.50 a share -- something that's well within reason -- the stock has a 32x price-to-earnings multiple even as the company has about 30% growth in revenue and earnings.
Facebook is at 38x earnings with only a slightly faster growth rate. But Alibaba's margins on earnings before interest, taxes, depreciation and amortization are 58% vs. 49% for Facebook, according to Wedbush, which has the best-published numbers on the company.
The rest of the compares? Well forget it. Amazon sells at 182x earnings with 20% revenue growth and a 5% margin. People are thrilled to own that one. Twitter has faster growth, at 66%, but its shares sell at 148x next year's earnings estimates, if it can earn anything. Tesla's (TSLA) got 56% growth but 2.2% margins, and it sells at 88x earnings. JD.com, with 48% growth and no earnings to speak of, sells at 572x earnings, even though the company constitutes the most direct comparison as an e-retailer. LinkedIn has a similar 33% growth rate, but it has less than one-fifth of the gross margin and sells at 83x earnings.
Only Baidu (BIDU), the Chinese Google, can give Alibaba a run for the money, selling at 25x earnings with 40% revenue growth and a 43% margin -- which is one of the reasons I like the stock so much. Google itself is very cheap on a P/E multiple -- it's priced at 22x next year's earnings, but revenue is growing at only 20% with 30% margins.
At $80, Alibaba has the best relative value and is certainly the cheapest of all of the large-capitalization stocks that have the holy grail, 30% earnings and sales, that the big-money guys want so badly. That's the most coveted.
2. Second objection: The ownership is very convoluted with many hidden owners and an opaque structure. Sure, that's true. We know Jack Ma, the major domo of Alibaba, owns about 8% of the company and is selling some stock on the deal. Yahoo! (YHOO) has 22%. The rest? It's not all that clear. But does it matter? They all obviously have skin in the game, so I don't think that's as big an issue.
3. Third objection: Corporate governance -- there is a very big board of 30-odd souls, and many of them Chinese Communists. The Communist Party has the right to pretty much do what it wants, as it controls the executive, legislative and judicial branches of the Chinese government. To which I say, so what? We've tolerated that with the very successful Baidu and JD.com deals. Why can't we tolerate it here? Just because it is bigger?
4. Fourth objection: Jack Ma can pretty much do whatever he wants with the company even though he owns only about 8% of it. To this I say, have you ever looked at companies with two classes of stock? Who do you think controls those? Who controls most of the major-media stocks? Who controls Google? You want to sell it on that, how in heck can you own Fox, or Comcast (CMCSA) or Viacom (VIA.B) or CBS (CBS)? The objection makes no sense when you look at plenty of much-loved situations. According to Forbes, in the media sector alone there are 45 companies with two classes of stock. I will take my chances.
5. Fifth objection: If the stock opens with a $180 billion valuation, or $80 a share, it's just too darned big. This is a recurrent theme. I don't get it. What does it matter? Let's say it opens at $90 a share. It is still priced similarly to Facebook, although it is more profitable and faster-growing than Facebook is. That's the direct comparison. Is there really another way to look at it? I can't think of one, unless you decide that Facebook is ridiculously overvalued, too. I find that a hard sell because, in truth, Facebook grows its top and bottom lines much, much more quickly than the average company does, and its stock certainly deserves a 38x multiple with those superior growth characteristics. Facebook should earn about $2.75 per share in 2016. Alibaba should earn $3.25 in 2016. I say, "So what if they have similar market capitalization?"
6. Sixth objection: Alibaba has a funky relationship with Alipay, which gives Jack Ma a serious advantage, because while he owns it he shares only 37% of the profit with Alibaba, and 30% of the e-commerce revenue comes from Alipay. OK, it's a risk. But hold it -- why doesn't Ma, who owns 8% of the company, unload much more than just 12 million shares? If he had intended to really take a much bigger percentage of Alibaba's profit for Alipay, why hasn't he dumped more?
7. Seventh objection? A lot more insiders will be able to sell stock on the deal than usual, and won't be locked up. All I can say to this is: amen. If we didn't have this newfound objection to the deal. Yes, the equivalent of about $8 billion in stock isn't locked up. I don't know how much will be sold. But if this is a $160 billion deal, and it will most likely be worth more than that, we are talking about a drop in the bucket.
8. Eighth objection: This is the top, and you have to sell it, as well as all of the other stocks like it, because it is 2000. Here's one I can really help you with. In that window, there were 300 unprofitable companies that came public and disappeared. Alibaba is extremely profitable, and arguably getting more so. These two eras are night and day. Only those who didn't bring a company public in that period, and didn't trade then, don't understand it -- which is just about everyone who complains about this stuff and makes the bogus comparisons.
9. Ninth objection: E-commerce will slow, and this could be a house of cards when it does. Only half of China is on the Internet, and that number is growing rapidly. Yet the brick-and-mortar operations, naturally enemies, are a fraction of what they are per person in China vs. that in the U.S. China is dramatically understored, and we are overstored. There's no real omnichannel in China, so the runway for Alibaba is the longest and best of any of the Internet companies that are publicly traded.
10. Last objection: The Chinese economy is slowing; what a miserable time to bring this. Actually, the export economy is slowing. The internal economy -- the retail economy -- is, if anything, growing faster, much faster than in the rest of the world. Anyway, if you went on the site you would know that this is an international company with both wholesale and retail operations. You are basically able to access workers to build things to suit anywhere around the world. Sure, you don't know the exact quality, but once this company is discovered you might never buy retail again.
Try as I must to hate this deal like everyone else, I just can't. Neither can hundreds of the big institutions that heard Alibaba's roadshow and have been furiously selling other stocks in order to raise all the capital they need to buy this one. I hear there are more than 100 institutions that want $1 billion in stock, and that was well before the roadshow was complete. They aren't sellers after the deal. They are buyers, as they simply can't possibly get that much, given the clamoring. My final advice: If you get some, you can always flip it. And if you hate it, well, guess what? You don't have to buy it.