Interactive Investor

Massive demand for Alibaba on US debut

19th September 2014 12:28

Lee Wild from interactive investor

Countdown to the biggest IPO of all-time has begun. Alibaba (BABA) yesterday priced its shares at the top of the range, valuing the Chinese ecommerce leviathan at north of $168 billion (£103 billion). But investors are desperate to get involved, and strong demand for the shares is likely to push the price much higher.

There's no doubt, Alibaba's corporate machine has done an incredible job over the past few weeks. An investor roadshow which put management in front of Wall Street's money men has been hugely successful. It meant the Chinese could price the float at $68 a share, netting as much as $25 billion for shareholders, including executive chairman and founder Jack Ma.

His right-hand man Joseph Tsai, US internet giant Yahoo and American buyout firm Silver Lake will cash in, too. So will Chinese state-owned companies CITIC Capital and Broad Sino Developments, and thousands of lucky employees.

Those shares have been mopped up, and demand far exceeds supply. That's why the share price is currently tipped to soar by about a third when trading begins on the New York Stock Exchange mid-afternoon UK time.

According to the grey market price quoted by spreadbet firm IG Index, Alibaba will open with a market capitalisation of between $216 billion and $226 billion. At the mid-price, Alibaba shares would be worth about $87.

Yet even that might appear modest in time. As we said yesterday, pricing Alibaba shares at $68 would put them on a forward price/earnings (PE) ratio of about 30. That's not particularly expensive when compared with tech peers, and earnings are expected to grow fast.

At $87, and using forecasts from Atlantic Equities for earnings per share (EPS) of $2.24 this year, the multiple gets close to 40 times. But it's back to 30 for the year to March 2016. Of course, Alibaba will have to keep doing the numbers to justify that rating, but there’s nothing right now to suggest it won't.

And the US market for IPOs has been incredibly buoyant this year.

Loss-making Chinese online retailer JD.com listed on NASDAQ in May, raising $1.8 billion. Placed at $19, the company's American Depository Shares are now worth $29.55, up a third (see below). And there really is very little in the read-across from rocky stockmarket debuts by Facebook and Twitter. The former was hardly making any money at all and Twitter was losing cash hand over fist. Alibaba is tipped to make about RMB 31 billion ($5 billion/£3.1 billion) this year and RMB 41.2 billion the year after, according to Atlantic.

Other new issues have prospered, too.

According to Renaissance Capital, the 190 IPOs that have got away so far this year have raised $40.1 billion and produced an average first day return of 13% (five have doubled). The Renaissance IPO ETF (exchange traded fund), a float cap-weighted basket of newly public companies and indicator of post-IPO performance, is up 8.1% versus 7.4% for the S&P 500.Over the past 30 days it's 6.4% versus 2.7%.

"This suggests that the IPO market remains receptive to new issuance as we approach the fourth quarter, a typically busy time for IPOs," says Renaissance. "The active IPO pipeline includes 140 companies looking to raise a total of $54 billion."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.