1. Alibaba VS. Mindshare 30/05/2012
Facebook Shanghai
Background
Last week Yahoo! reached an agreement with Alibaba Group for Yahoo! to sell back half of its 40% stake in the
private e-commerce company Taobao, now majority-owned by Alibaba, for $7.1bn. The deal valued Alibaba
holdings at $35bn. Meanwhile, on the other side of the world a company called Facebook released shares to
the public that valued the social network at $104bn. It was the largest IPO in US corporate history.
HUNCH vs. CRUNCH
One way to evaluate companies is to compare the respective price-to-earnings ratio. This is the current market
value of the company divided by its current year’s profit. A high P/E shows that investors expect high earnings
growth in the future. When Google went public in 2004, its P/E was just over 67. Now, with a solid business
model and soaring revenue, Google’s P/E is a little under 18. Apple’s is 14. Facebook’s P/E is over 100.
Alibaba’s P/E is harder to work out, and the reason why is Taobao. As a private entity, Taobao’s financials are
not explicitly referenced in Alibaba’s earnings. However, if Taobao operates at similar margins to Alibaba – a
fair assumption – we can take 27% of $1.4bn as profit. $380m. 20% in Taobao is therefore worth around $76m
of incremental profit to Alibaba holdings. Added to the $270m reported from 2011, before this deal with
Yahoo! was struck, Alibaba’s latest P/E ratio is 101 – the same ballpark as Facebook, but a different ballgame
altogether from big-swinging Google and Apple.
THE WEIGHT OF EXPECTATION
VALUE (current $m) 104,000 35,000
REVENUE ($m) 3,700 1,298 *1,018 + 280+
PROFIT ($m) 1,000 (27%) 346 (27%) *271 + 76+
PRICE / EARNINGS RATIO 104 101
Sources: iResearch; Bloomberg; Alibaba FY11 investor report; Napkin, The Back of a.
TAOBAO-WOWZER!
With 194million shoppers, China’s ecommerce market has surpassed the US as the largest in the world by
number of people and, over the next three years, it is expected to quadruple in size to hit $2.85billion in
transaction volumes, making it the world’s most valuable. At the center of this storm is Taobao.
Today, Taobao boasts 90% share of China’s C2C market, 50% of its B2C market, and 60% of the country’s
express delivery service sector. Taobao lists 800million items on its sites at a total value of $60bn – 13% more
than eBay. However, Alibaba’s profits don’t reflect this. Taken alone, Taobao’s profit levels are less than 1/6th
of eBay’s.
POKER FACEBOOK
$104bn is 63x what Google paid for the acquisition of YouTube, and values each of Facebook’s 900million+
users at roughly $115. While many university students would probably jump at the chance to exchange cash
for their pub-crawl photos, this choice is not their privilege to make. Investors will be quick to remind us that
while Facebook is the service whilst it is the people, and the data they produce, that make up the product. The
more people, the more data, the more value. The $100bn question is: how much value?
If Facebook is to realize the high expectations implied in its P/E ratio it needs to find a way to realize this
value, similar to how Google realized its value through Adwords.
WRAP UP
The market expects great things from these two companies, success isn’t guaranteed for either. Time will tell
if the hype is based on anything more than hunch.