Remember being spun around, pin in hand, and being told to attach the tail to the donkey? Anyone trying to value Alibaba will recall those sensations: dizziness, inability to see, and reliance on guesswork. The Chinese e-commerce giant has yet to choose a stock market venue but that does nothing to diminish its status as the world’s hottest big listing-in-waiting. Most polls of analysts give Alibaba a market capitalisation above $100bn and, increasingly, north of $150bn. Pricing a company where so little information is available is more like a party game than a serious exercise.
Even so, hand over that blindfold. Combing through filings by Yahoo, a 24 per cent owner, gives Alibaba-watchers numbers for sales, gross profit, operating profit and net profit. Sales rose 65 per cent in the year to the end of September 2013, while profits jumped fourfold – an increase not explained. Alibaba has only produced net profits from operations since 2011. Try predicting earnings with any degree of confidence off that. Assume, say, that sales this year continue to grow at their most recent rate of 51 per cent. Use a net margin of 14 per cent – the rate in 2011 and 2012 – and full-year net profits by September 2014 would be $1.42bn. But use instead last year’s $2.85bn profits, raise that by 51 per cent, and net income reaches $4.3bn.
Choosing comparisons to provide market-sanctioned multiples is as tough as predicting profits. Rakuten, arguably Alibaba’s closest peer, given its similar model, trades on 33 times forecast earnings – racy for Japan but so-so for hot internet stocks in Asia. Tencent, the Hong Kong-listed Chinese internet giant, trades on 38 times. In the US, valuations are far higher: Facebook trades on 53 while Amazon offers a mind-boggling 185. Applying those multiples to the two profit figures gives a range of $46bn to $795bn. It is not hard to come up with $100bn-plus. Still, hand over the pin and point out the donkey, please.