We asked Brian Hamilton, the chairman of the financial information company Sageworks, to give us his thoughts on Alibaba's planned IPO.
1. Alibaba's IPO filing says it will raise $1 billion, analysts say it will raise closer to $15 billion and reports say it could be valued at $200 billion. Can you translate that for me?
Valuation is calculated by multiplying a company's share price by the number of total outstanding shares. For example, when Amazon went public in 1997, it had 23.8 million total outstanding shares at an IPO share price of $16; therefore it was valued at approximately $381 million (23.8 million x 16 = 381 million).
One should never look at the valuation in isolation. Instead we should look at valuation, in relation to sales and profits. The sales multiple (the company's valuation divided by the company's revenue) and the profit multiple (the company's valuation divided by the company's net profit) give a better indication of "relative value." For example, the dollar amount of Twitter's IPO valuation was much less than the dollar amount of Facebook's; however, taking the sales multiples into account, Twitter'srelative value to sales was more than twice that of Facebook, indicating a richer valuation.
At this point we do not have a confirmed IPO share price for Alibaba, so we do not have a precise valuation. Reports have Alibaba valuing itself at $109 billion as of April, but other analysts estimate that Alibaba may be seeking a valuation upwards of $200 billion when the IPO debuts. Unfortunately, until we get the confirmed number of total shares outstanding and the share price at the time of the IPO, we will not know the company's official valuation.
2. Now that you've gotten a better look at Alibaba's financials, what do you think of the company?
The fundamentals are really, really strong. This is a company with positive cash flow, nearly one and half billion dollars in profits, a solid net profit margin, and solid revenue growth. This appears to be a real company with real profits and revenue.
3. Does Alibaba's valuation seem fair? / 4. How does that valuation compare to other Internet companies (such as Facebook, Twitter) when they went public?
We'll have to see what the final valuation is when the company prices it's IPO shares, but even when you look at the very "conservative" self valuation of $109 billion, it's a very rich valuation. They'd be valued at, at the very minimum, 20 times sales and 80 times profits, but most likely closer to 30 times sales and 125 times profits, if the final valuation ends up being closer to $170 billion-$200 billion. That's not quite as rich of a valuation as Twitter, which went out 40 times sales, but compares Alibaba's relative value to that of Microsoft when it went public. Microsoft was less than one-eighth of the relative value of Alibaba, even looking at the most conservative valuations of Alibaba.