Heard Off the Street: Alibaba’s SEC filing is drawing a lot of looks

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Widespread carnage in the tech stock sector has done little to blunt enthusiasm over China’s largest e-commerce company’s plans to offer a stake in the growing enterprise to investors.

Alibaba disclosed preliminary details of its initial public offering last week. While it did not say how much stock it will sell or at what price, its lengthy Securities and Exchange Commission submission drew a lot of interest. And deservedly so.

The Cayman Islands-registered company processes $248 billion of orders annually — about 66 percent more than Amazon [ticker: AMZN] and eBay [EBAY] combined, according to Brendan Ahern, managing director of KraneShares, a New York firm that offers exchange-traded funds that invest in Chinese companies.

While estimates of Alibaba’s value vary widely, Mr. Ahern said the median value of $168 billion makes it bigger than 95 percent of the companies in the S&P 500.

Among publicly traded Internet companies, only Google [GOOG] has a larger market cap, $352 billion based on its stock price Friday. By comparison, Facebook [FB] has a market cap of $147 billion, Twitter’s [TWTR] is $19 billion, and Amazon’s is $134 billion.

Stocks of most of those companies have been battered this year. Critics would say that’s because investors have come to their senses.

Shares of Amazon, down 27 percent this year, still are selling at 254 times what the company is expected to earn this year. Twitter, which is not currently profitable, closed Friday at $32.05, leaving it down 50 percent for the year but well above its $26 November IPO price.

Then there’s King Digital Entertainment [KING], the maker of the online puzzle game “Candy Crush Saga.” King’s wildly anticipated IPO debuted at $22.50 on March 25. Since then, its shares have been crushed, losing more than a quarter of their value. They closed Friday at $16.30, leaving them priced at about 7 times 2014 forecast earnings.

Facebook, whose 2012 IPO got off to a rocky start, has survived the downdraft relatively intact. Its shares are up 5 percent this year and are trading at 40 times forecast 2014 earnings.

Mr. Ahern said there’s something else about Alibaba, other than its size, that merits investor interest.

“Not only do they have sales that are growing, they also have net income,” he said.

According to the filing, Alibaba had net income of $1.37 billion on revenue of $5.55 billion for the fiscal year that ended in March 2013. Over the next nine months, it generated earnings of $2.85 billion on revenue of $6.51 billion.

The filing lays out plenty of reasons why Alibaba should keep growing. Less than half of China’s 1.4 billion people use the Internet, and only about 8 percent of consumer shopping is done online. Online commerce in China is expected to grow at a compound annual rate of 27 percent through 2016, according to market research data Alibaba provides in the filing.

Additionally, the company expects to benefit as China’s leadership steers the country to a more consumer-based economy. Consumer spending accounts for about 37 percent of the Chinese economy versus about 67 percent of the U.S. economy, according to the filing.

IPO offerings are required to disclose the risks associated with investing in a company’s shares, and Alibaba provides 38 pages of precautions. Many are boilerplate: what could happen if the company has the same kind of issues Target [TGT] had over the Christmas shopping season; investing in the business could crimp profit margins; key personnel could depart.

But a few of the disclosures may give some investors pause. The People’s Bank of China is considering new regulations covering online shopping and mobile payments, according to the filing. If adopted, the regulations could limit the amount of money that consumers could spend from their online and mobile pay accounts.

“The Chinese government can make or break a business,” said Ronald Heakins of OakTree Investment Advisors in Shadyside.

Kim Forrest of Fort Pitt Capital in Green Tree cites another precaution.

“It’s my worry that because of the opaqueness of accounting standards in China that it’s not really clear where the profits are coming from,” she said. “Because of the opaqueness of financial reporting in China, I prefer to make my money elsewhere.”

A lot of investors won’t share her view, but they’ll have to wait. Alibaba still has to pitch the IPO to analysts and large investors, as well as flush out the share price, the number of shares to be sold, and other details of the offering.

Current shareholders such as Yahoo, which owns nearly 23 percent of Alibaba, could sell some of their shares as part of the IPO. Mr. Ahern said it might take two or three months or longer for all of that to come together. Market conditions could further delay the IPO, he said.

In the meantime, do your homework and be careful out there.

Len Boselovic: 412-263-1941 or lboselovic@post-gazette.com

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