Analyst pegs Alibaba valuation at $245 billion

The company, headed for an IPO later this year, is worth as much as 10 Tesla Motors combined, says Bernstein's Carlos Kirjner.

By MSN Money Partner Apr 18, 2014 11:04AM
Credit: © Hong Wu/Getty Images
Caption: The Alibaba Group headquarters in Hangzhou, ChinaBy Stephen Russolillo, The Wall Street Journal

$245 billion!

That's the valuation Bernstein analyst Carlos Kirjner slapped on Alibaba Group Holding Ltd. following the glimpse at the better-than-expected results investors got this week.

Yahoo (YHOO), which owns a 24 percent stake in Alibaba, said late Tuesday that the China-based e-commerce giant’s revenue jumped 66 percent in the quarter ended Dec. 31, well ahead of analysts' estimates.

The results buoyed investor optimism for Alibaba ahead of its initial public offering in New York. The deal, expected later this year, could raise about $15 billion from investors, just shy of what Facebook (FB) sold when the social-networking firm went public in May 2012.

"Holy Alibaba!" Kirjner wrote in a note to clients. "We believe these results vindicate our views that Alibaba is a highly valuable asset, worth much more than what we think was reflected in Yahoo’s stock price."

A $245 billion valuation for Alibaba would make it the ninth biggest U.S.-listed company in the S&P 500, ahead of Chevron's (CVX) $231 billion market capitalization and just shy of Wal-Mart Stores' (WMT) $249 billion market cap, according to data compiled by FactSet.

Put another way, that's ten times the size of Tesla Motors (TSLA), which has a market cap of about $24 billion.

Or it's bigger than what you'd get if you added together the market values of Goldman Sachs (GS), Target (TGT), Ford Motor (F), Starbucks (SBUX), Chipotle Mexican Grill (CMG) and J.C. Penney (JCP). Those six companies together add up to roughly $242 billion.

Yahoo shares, which are closely tied to Alibaba’s prospects, jumped 6.5 percent to $36.38 on Wednesday. Yahoo’s stock is up more than 40 percent in the past year.

A combination of sheer size and outsized growth is what investors could find attractive when Alibaba hits the public markets. From WSJ’s page-one story this week:

Big doesn’t come close to describing Alibaba Group Holding Ltd. now.

Taobao, a website dreamed up in [Chairman Jack] Ma's apartment a decade ago, has about 800 million product listings from seven million sellers who pay Alibaba for advertising and other services. In 2013, the combined transaction volume of Taobao and another Alibaba-run shopping site called Tmall reached $240 billion, says a person with knowledge of the figure.

The total is more than double the size of (AMZN), triple the size of eBay (EBAY) and one-third larger than the value of all the transactions last year at the two U.S.-based e-commerce giants combined.

Here's the math behind Mr. Kirjner's valuation projection:

We are raising our valuation for Alibaba to $245 billion and for the Yahoo stake to a very conservative $26/share. We currently expect Alibaba's operating margins to grow 63 percent and 40 percent in FY14 and FY15, and believe this is still quite conservative. As a result, we are now forecasting materially higher net income for Alibaba in 2014 and 2015. We expect Taobao and Tmall will deliver 2016 net income of $9.5 billion ($7.4 billion in 2015), growing at 28 percent YoY (41% in 2015). As a result, we now value Taobao and Tmall at 25 times 2016 earnings (a 2016 PEG ratio of 0.9, below Tencent’s current PEG ratio for 2016 earnings of 1.1x), to get $237 billion. We continue to value Alipay and at around $7.5B combined, resulting in an Alibaba Group value of around $245B.

And here's a breakdown, in chart form, of Kirjner's estimates.

As the Journal reports, Alibaba never has been as much of a game-changing innovator as Apple (AAPL) or Google (GOOG). Rather than inventing revolutionary products, Alibaba often adapts existing technology to serve China's fast-growing e-commerce market. Alibaba also doesn't own the merchandise it sells. The company is a middleman, making most of its money from charging merchants for marketing and ad services so they can stand out in the crowded marketplace.

Alibaba is tiny in revenue compared with Amazon because the Seattle company sells products to consumers. Amazon had net income of $273 million last year on revenue of $74.5 billion last year. By comparison, Alibaba had net income of $3.52 billion last year on revenue of $7.95 billion.

The question for investors: Can Alibaba keep growing at a pace that pleases Wall Street? That answer will go a long way to determining whether Kirjner’s valuation will be achievable.

More from The Wall Street Journal

Apr 21, 2014 10:16AM
If that's what the analyst says, then it must be true. I, however, would have valued the company at $100 trillion:)
Apr 18, 2014 12:27PM
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