Past company value is no guide to future performance

By Paul Mackintosh - 12/05/14

Anyone worldwide capable of reading will probably have noticed that Alibaba, China's online mart par excellence, has decided to go IPO – and what's more, in New York. Given the size of the entity involved, it would be hard to miss. Alibaba, according to figures from The Economist, handles 80% of all China's online ecommerce, and has sales value greater than eBay and Amazon combined. Alibaba's ecommerce sites netted some US$250 billion in revenue in 2013. And the venture capitalists (VCs), which invested serially into Alibaba over the years, including GGV Capital, Fidelity Growth Partners Asia, Silver Lake, DST Global and Japan's SoftBank, are about to be rewarded with a big payday.

Given such volume and such market dominance, Alibaba ought to be able to cruise into the public markets, no? Not so. The choice of the NYSE as the listing venue was partly dictated by the fact that Hong Kong's regulatory authorities had already rejected the IPO, citing, among other concerns, the fact that founder Jack Ma would enjoy a guaranteed board seat in perpetuity. For some, this might point up the Hong Kong Stock Exchange's tendency to focus on procedural niceties and miss the big picture, while the American exchanges are now being rewarded for their aggressive salesmanship out East. All the same, the fact that a major Greater China exchange that ought to have been the logical venue for the Alibaba IPO rejected the flotation ought to give investors some pause.

Furthermore, Alibaba is only listing a portion of the company initially, as much to test the market conditions as to realise its full value. Yes, the IPO could raise some $15-20 billion, pushing it into record book territory. Yes, Alibaba's total valuation could reach as high as $150 billion, although the group itself favours a valuation closer to $110 billion. But the recent slides in tech stocks, as well as Twitter's hard work in pushing its listing valuation, indicate that there are no more easy rides for now for tech propositions – least of all in the country that invented the practice of shorting China stocks.

Also, as The Economist points out, past company value is no guide to future performance. Alibaba has dominated PRC ecommerce so far, but the market has now changed significantly, not least with the advent of large-scale mobile ecommerce. Alibaba could find its competitive advantage increasingly eroded in this new environment. Hence, the company could in fact be listing wisely at the peak of its value, before that market share and all those rosy numbers lose their bloom. A smart move for Alibaba and its VC backers – more of a concern for IPO investors.