Yahoo! Getting a Boost from Alibaba.com

by StockJockey

Tuesday, October 23, 2007 - 10:40 am

The IPO of Alibaba.com Corp has tongues wagging on Wall Street. Management has been making the rounds with institutional investors on the road show, which was duly noted yesterday on Squawk box by David Faber.

We had written a piece on October 10th that we decided not to publish, but are revisiting the topic:

October 10th
Yahoo! problems have been well documented. But the coming IPO of Alibaba.com in Hong Kong could add a little zip and volatility to Yahoo!’s stock, and is likely responsible for the last point or two in the stock.

Yahoo will buy 10 percent of a share sale by Alibaba.com, China’s biggest e-commerce firm, as it steps up a battle with Google and Baidu in the world’s second biggest Internet market.......Yahoo already has a 40 percent stake in the Chinese firm’s parent, Alibaba Group, which took over Yahoo’s China operations in 2005 and has been reorganizing it since.

Yahoo China trails its main rivals in the search engine market, worth about $600 million a year, with a 12.5 percent share, compared with Google’s 21 percent and Baidu’s 58 percent, according to research firm Analysys International. Red Herring

But the sex appeal in the story is apparently in Alibaba’s B2B segment, which brings to mind a number of high flying IPO’s back in the late 90’s. Do you remember Commerce One?.

But Alibaba dominates the business-to-business segment, handling 69 percent of trade value, and fund managers believe the firm will get even stronger with Yahoo’s backing.

The industry is potentially lucrative if more of China’s 32 million small and medium-sized enterprises (SMEs) can be persuaded to use the internet.

Trade among Chinese SMEs reached $532 billion in 2007, and will grow by about 15 percent per year over the next five years, according to Shanghai-based consultancy iResearch. Around one-third of these firms use some kind of online service.

“Alibaba.com is the leader in B2B business. With Yahoo’s back-up, it’s easier for the company to gain market share,” said Kelvin Wu, principal partner at private equity firm AID Partners.

About 73 percent of Alibaba.com’s revenue in the first half of 2007 came from its international online market place, which brings together importers and exporters.

As of June 2007, Alibaba.com hosted 2.4 million supplier storefronts, with on average 2.9 million new product listings per month. Buyers click on product listings and are taken to suppliers’ storefronts.

With the firm’s customer base growing fast, Goldman Sachs expected Alibaba.com to post a 629 million yuan ($83.78 million) net profit in 2007, a 186 percent jump from last year. Alibaba plans to sell 858.9 million shares, or 17 percent of its enlarged share capital, in its Hong Kong IPO. Other than the portion reserved for Yahoo, 75 percent of the share sale is earmarked for global investors and 15 percent for Hong Kong individual investors.

Goldman Sachs has the books, and pricing is tentatively set for November 6th.

Yahoo! apparently owns about 40% of Alibaba Group, the parent company of Alibaba.com. No doubt they will see a nice pop on the shares they will get to purchase in the IPO, and it is possible that Sunnyvale’s stake in the outfit could be worth several billion dollars by the time the dust settles.

Which might translate into perhaps $2-$3 dollars per Yahoo! share, on the back of the envelope anyhow. Which might be enough to send Yahoo! to $30 per share in short order. And $35 might not surprise us given the animal spirits percolating around all things Chinese, and internet too.

But that was then, and this is now. The pricing range has just been increased, and the founder is stoking the flames going into the deal, as it would appear from the latest update, courtesy of Forbes Magazine:

The pricing works out to an astronomical price-to-earnings range between 94.5 and 106.3 times 2007 earnings. By contrast, Google shares were priced at a P/E of 90 in its IPO and currently fetch a 50.66 multiple.

Ma, who spoke from a road show in the U.S. via a teleconference link to a roomful of reporters in Hong Kong on Monday evening, defended the pricing, saying the company had room to raise it even higher. “Some investors who had missed out on Google’s IPO don’t want to miss out on Alibaba’s,” he said.

His No. 2 man, Alibaba.com chief executive David Wei, said many investors are buying into the company’s growth prospects for 2008 and beyond, which makes the pricing look more reasonable.

The shares will not beging trading for nearly two weeks, which gives the fast money crowd a little time to move Yahoo!’s stock to where they see fit. The stock might challenge the 52-week high, which is only a seven-iron from here. With the animal spirits taking control of the stock, perhaps long suffering Yahoo! investors will finally get a chance to make a sale into a ramp.

But the question is, how long will this magic carpet ride last?

10.09.07
Yahoo Grabs Stake in Alibaba.com IPO
Red Herring

10.23.07
Is Alibaba Worth More Than Google?
Forbes
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