Can Alibaba sustain its magic carpet ride?

Chinese e-commerce giant Alibaba’s share price has rocketed upward after its record-busting splash on the New York Stock Exchange, but are investors getting ahead of themselves?

Alibaba’s IPO on the NYSE last week was the largest ever debut listing on the bourse, and its $68 a share price quickly soared a peak of $93.89 on the first day’s trading.

It has since settled to $88.76 at noon Friday.

Morningstar Equity Research consumer equity strategist RJ Hottovy says the stock has been hovering around the firm’s $90 “fair value”.

That is based on a compound annual revenue growth rate of 32 per cent for the next five years.

Offering shares at such a discount to the company’s estimated worth was deliberate, he says.

“The goal from the very beginning was just to avoid a situation – like Facebook – where you see shares trading down from the offer price.”

He believes the firm was less interested in eking out the most cash possible than getting the listing away smoothly and building its profile.

“They are sitting on a pretty healthy cash balance as it is and it’s more of a way to diversify the shareholder base and raise the company’s profile,” he explains.

Alibaba is like a meld of Ebay and Amazon, he says, although unlike Amazon it does not hold stock. It allows gives a sales outlet for large businesses to sell to consumers, as well as a place for small suppliers to sell to other businesses or customers.

Simply providing a marketplace makes is very cash generative, he adds, as it can clip the ticket of sales as well as sell advertising on its websites.

It attracts 80 per cent of China’s e-commerce and has in-roads into other countries as well. Although, its ability to penetrate the developed markets is dubious because of the strength of entrenched companies such as Amazon, he says.

“I think they will have more success in contiguous emerging markets.”

Investors need to be careful of the company’s unusual governance structure that allows a partnership of founder Jack Ma and his Chinese cohorts to control the board, he warns.

“That’s an area where we have some concerns: The partnership owns a larger share of Alipay than the company does. Something that investors have to be aware of.”

Alipay is an online payment platform, like PayPal, which was split out from the company at the Chinese government’s insistence in 2010.

Invesco Perpetual Asian equities manager William Lam says his team subscribed to the IPO, but got a much lower allocation due to massive demand.

The team is “usually sceptical” about IPOs, but for Alibaba they made an exception.

He is comforted that founder Ma is not selling most of his stake; the largest seller is US web giant Yahoo! which has no control of the company.

“If the seller controls the company then they may be able to reduce costs, defer expenditure, or even accelerate revenue recognition in the period leading up to the IPO, thus inflating current earnings,” he explains.

Yahoo is not selling as much as it first intended and another shareholder, Softbank, is not selling at all.

“We believe that the company’s management are more interested in creating a positive association with the Alibaba brand than they are in establishing a high price for the IPO,” he adds.

Lombard Odier Technology fund manager Bolko Hohaus says Alibaba has impeccable timing as investors embrace the Chinese consumption theme.

“With China already being the largest internet market globally measured by users the company seems to be a perfect way to play the rising trend on internet shopping in China,” he says.

He believes the company’s 47.5 per cent operating margins are “unsustainably high” and believes its revenue will grow more slowly as it pushes into the mobile space.

Morningstar, on the other hand, expects margins to expand further to 50 per cent.

Hohaus says the company does not have “supervoting” share classes, like Facebook and Google, which is “good news”.

The listing price appeared cheap compared to analyst estimations of the company’s value, that range between $190bn and $250bn, he says.

With an opening market capitalisation of $167.6bn, its current value is $219.2bn, much closer to the analysts’ views.

“If analysts’ consensus figures around net income pan out, and assuming the firm’s very high margins are sustainable and growth is in line with estimates, the valuations we’ve seen don’t look stretched,” he explains.

“Don’t forget that investors are getting access to a business which is almost a monopoly in one of the world’s most exciting internet markets.”

“One thing is clear,” Hohaus says.

“With Alibaba’s IPO investors will get access to one of the major global internet players and the Asian group of listed Internet companies will get – measured by market capitalisation – a new number one.”