(B)(N) BABA Alibaba Group Holdings Limited

Alibaba takes New York, September 8, 2014 Courtesy: New York Times & Cun Shi

Deal Book. Alibaba was but a vision of its founder, Jack Ma, in 1999, but the company has already created several multi-billion dollar private fortunes, and some huge gains for early investors such as SoftBank (which owns 33.4% of it) and Yahoo (22.6%).

The company has six lead underwriters (Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citigroup) who are set to launch a new issue of  between 320,106,100 and 368,122,000 ordinary shares (ADS), of which 197,029,169 shares will be provided and sold by the founders (Jack Ma and Joe Tsai) and Yahoo.

The offering is expected to raise $7.6 billion for the company, and value the company at up to $162.7 billion and between $60 and $66 per share for all the shares outstanding (2.341 billion).

Ecosystem Alibaba

However, “price” is no object and it’s natural for us – the merely safe, liquid, and hopeful people – to wonder what $60 per share will buy in this unlimited industry of internet marketing of 3rd party products, and business and personal services – e-commerce Alibaba – which is an ecosystem that already surpasses global “food” chains such as WalMart, and has sales and financial transactions in excess of $800 billion per year in less than 10% of the plausible markets in over 190 countries; please see the prospectus for further details.

Maybe earnings don’t matter that much? Is it the people?

We don’t have any reason to think that the issue won’t sell out at the maximum price of $66 – it probably will – but the stock price could be anything, thereafter, because the only thing that’s holding up the stock price is investors and their money, and they are willing to pay 75× earnings for Alibaba, and 870× earnings for Amazon, neither of which pays any dividends – amazing – but we would be wrong to be merely judgmental and not to be engaged thereby.

The corporate mission is “to make it easy to do business anywhere” (ibid, the prospectus) and, so, we’ve included “large competitors” in all or some part of that “ecosystem”, which has been a huge success in China and, we would think, is transportable to different countries and cultures, at least as a “concept” with the proven technology to back it up; please see Exhibit 1 below for the Fundamentals.

Exhibit 1: E-commerce Alibaba et al – Fundamentals

(B)(N) E-commerce Alibaba et al – Fundamentals

Figure 1.1: (B)(N) E-commerce Alibaba et al – Risk Price Chart

In aggregate, the companies gained +31% in market value last year, and are up another +12% so far this year.

They earned $97 billion (net) and returned 26% of that to the shareholders for a dividend payout of $25.6 billion and an aggregate dividend yield of 1.1%; please see Exhibit 1 above and the chart on the left.

Of the sixteen companies, between seven and thirteen of them were (B)-class at some time last year, and that portfolio was up (well over) +100% last year.

We’ve trimmed back the holdings to only eight companies at the present time and, as is evident from the chart in Figure 1.1, these companies are rather tight to the price of risk and momentum driven when above it, which makes it all the more important to keep an eye on the stop/loss position and to be always prepared for the inevitable downdraft; please click on the links (and again to make them larger if required) “(B)(N) E-commerce Alibaba et al – Prices & Portfolio and Cash Flow Summary” for further details.

Figure 1.2: E-commerce and Alibaba et al – Enterprise Risk & Coase Dividend

We can understand the pricing of these companies by looking at the Enterprise Risk = 1 + log(N/N*) and, since so few of them pay dividends, try to “price them” on the basis of what investors are willing to pay for the Coase Dividend, which is the primary raison d’être for these companies, and a measure of  the worth of the “ecosystem”, and how they live absent competent earnings and dividends; please see Figure 1.2 on the left, and click on it to make it larger as required.

For more information on the chart elements and the “Five Equations of State”, please see our recent Post, “(B)(N) Through The Looking-Glass“.

And for more information on real “risk management” and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

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For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.