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Alibaba Tamps Down Valuation Expectations

logo1Having let the markets get pumped up with huge expectations for its upcoming mega IPO, e-commerce leader Alibaba now appears to be trying to temper some of those high hopes in the run-up to an offering that is likely to be the biggest ever for a Chinese Internet firm. The reason for the sudden change of tone? Apparently the company wants to avoid following in the footsteps of social networking giant Facebook, whose IPO was so overhyped by the time it finally occurred that it was almost bound to result in failure and major disappointment. From my observer’s perspective, I’m happy to finally see Alibaba changing its tone, even if it appears to be doing so through unnamed sources speaking off the record. Ever since faded U.S. search giant Yahoo purchased 40 percent of Alibaba in 2005 in a deal that valued the company at around $3 billion, the value of China’s e-commerce leader has been growing by leaps and bounds, and some estimate it could now be worth more than $100 billion.

Certainly much has changed at Alibaba since the initial Yahoo investment, most notably the explosion in its consumer-focused e-commerce Taobao and TMall units, as well as the rapid rise of its AliPay e-payments service. But the company’s valuation—which was pegged in the $35 billion range just last September—seems to be growing much faster in some people’s views than its top or bottom lines these days.

Let’s look at the latest reports, which have two major media sources simultaneously citing an unnamed source saying Alibaba wants to aim for a more conservative valuation than that achieved by Facebook, which was valued at more than $100 billion at the time of its IPO last year. The reports don’t say who or where the source is, but I suspect it was someone either inside Alibaba or perhaps at an investment bank close to the IPO process. Of course everyone knows that Facebook’s IPO ultimately was a disaster, with the stock losing half of its value at one point after the offering.

The latest media reports are saying the median estimate of 8 investment bank analysts now peg Alibaba’s value at about $62 billion, though even that could be considered high for a company expected to post 59 percent revenue growth this year. That valuation would put Alibaba on par with Tencent, which is currently China’s biggest Internet company with a valuation of about $62 billion. That kind of number does indeed look more realistic and would probably be enough for Alibaba founder Jack Ma, who likes to be the biggest and best in everything he does.

From a broader perspective, the timing of these latest comments seems to indicate that Alibaba is already testing the market to possibly launch its IPO in the next few months. The company hasn’t commented on its specific timetable, but current market speculation is that the offering will come either this year or next.

I’ve previously written that Ma has made most of the necessary preparations for an IPO, and is now simply waiting for the right window of opportunity to launch the offering. U.S. and Hong Kong markets have been decidedly lukewarm towards China offerings over the last year, though we’ve seen some recent signs that sentiment may be changing. Two major Chinese firms, Sinopec Engineering and Galaxy Securities, were set to hold IPOs in Hong Kong this week to raise a combined $3.5 billion, making them some of the biggest in half a year.

If those 2 offerings do well over the next few weeks, many observers could  declare the IPO winter of the past year officially over. If and when that happens, look for a flood of new offerings to appear in the months ahead, both in New York and Hong Kong, with Alibaba quite possibly among the field of new candidates.

Doug Young lives in Shanghai and writes opinion pieces about tech investment in China for Techonomy and at www.youngchinabiz.com. He is the author of a new book about the media in China, The Party Line: How the Media Dictates Public Opinion in Modern China.

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