Alibaba Will Go Public in U.S. Market

As I mentioned in a previous blog on Chinese conglomerate The Alibaba Group, their IPO will take place in the U.S. public market. Alibaba intends to raise $1 billion in its IPO; however, industry experts estimate that it may raise upwards of $15 billion, which would make it the biggest U.S. IPO since Facebook.

 
Alibaba’s valuation was expected to be around $130 billion, which is one of the highest valuations for any IPO. Based on the number of shares it intends to sell and the price, the valuation could be even higher, in the neighborhood of $200 billion.

One of the hallmarks of the recent IPO boom has been extremely high valuations, accompanied by much debate over whether they are justifiably high. Here’s a look at Alibaba’s movement towards their IPO and valuation considerations.
 
Almost ten years ago, in 2005, Alibaba was valued at $2.5 billion. Since then, Internet-based commerce has substantially changed, and Alibaba has expanded its business including the addition of Tmall.com. The company has also grown to 231 million active buyers, which is twice that of Amazon. The fact that there are several secondary businesses, that are either owned by Alibaba or its founder, Mr. Jack Ma, may provide diversity for the company and will allow it to evolve and change over time as needed.

What’s also different about the Alibaba IPO, compared to some of the other tech companies to recently hit the market, is that Alibaba is showing an approximate profit margin of 45%. To provide a comparison, the well-known shopping site eBay reported a profit of slightly less than 18%.  Alibaba’s high profit margin may be due to their low tax rate (approximately 10%) and it’s low overhead, since it doesn’t own the merchandise it sells.

Is Alibaba’s high valuation warranted? With a high user base, a diversity of business investments, and a high profit margin, Alibaba’s IPO will definitely garner significant attention; only time will tell whether the valuation was justified.