I. Thesis and summary

Open Sesame!

Alibaba Groups’ IPO, underwritten by Citi Croup, N.A., the global e-commerce company based in Hangzhou, China, offered common shares to the public on September 17, 2014. Shares traded in high demand, and raised more than $21B for the Former CEO and Founder Ma.

The market’s voracious appetite catapulted Alibaba to a mammoth figure of $227.5B capitalization. At that cap, Alibaba is 3.5x larger than eBay’s $65.4B and 1.5x bigger than Amazon’s $150.2B

Similar to the $349B Google Inc., Alibaba appears to defy value investing logic, as the stock is delivering outstanding growth.  But regardless of however promising this growth may seem, Alibaba still has fundamental concerns and should be examined by prudent investors.

II. Alibaba Group

Source: Alibaba

Founded in 1999 by English Lecturer Jack Ma, along with 18 other people, Alibaba Group Holding Ltd. (NYSE:BABA) is based in Hangzhou, Mainland China. The company is operating e-commerce businesses, including business-to-business, online retail, digital payment services, and delivering a shopping search engine as well as cloud computing services. Led by Ma, who initially built the platform to help small business owners in China have access to larger markets, thus, competing on more equal terms with larger corporations.

Size Limits Growth, Seems Like Ingenuity and Value Bent Logistic

Over the years, Alibaba had grown rapidly to become an elite global e-commerce, overshadowing even eBay Inc (NASDAQ:EBAY) and Amazon.com, Inc. (NASDAQ:AMZN).

According to Alibaba, “Our success and rapid growth is built on the spirit of entrepreneurship, innovation, and an unwavering focus on meeting the needs of our customers. We believe that a strong sense of shared values enables us to maintain a common company culture, no matter how large we grow.”

“Values are fundamental to the way we operate and how we recruit, evaluate and compensate our recruit.”

Besides its strong corporate culture as alluded, the e-commerce retailer also has a “primed” business model.

III. Corporate strategies

Leveraging on vastly expanding global markets, Alibaba is reaping enormously escalating profits. The firm targets the sheer size and economic growth of the world’s largest populations: 1.3 billion people in Mainland China and 198 million inhabitants of Brazilians.

By “gross domestic product “GDP,” China is a world leader, second only to the United States. Data from the World Bank shows that despite China’s economic growth normalization—from an aggressive rate of 10 percent beginning in 1978, toward 7.7 percent in 2012—similar stellar growth is expected into the foreseeable future.

Economic Growth Data of China, Brazil and the United States

Source: World Bank

Alibaba’s ambition expands beyond China, as the firm is tapping into another gigantic and growing international market, Brazil. Home to Legendary Football Players Pele and Ronaldo, Brazil’s large and expanding middle class is seeking bargain at online markets like the Hangzhou e-commerce platform. Merchandises in Brazil are sold at significant premium to those available in the Chinese’s market due to the country’s deflationary pressure. The price differences are, therefore, too enticing for shoppers to take a pass. And as long as these arbitrages exist, Alibaba is likely to enjoy increasing profits from Brazil.

IV. The Management

Founder, Jack Ma, is a 49 year old English lecturer at the Hangzhou Teacher Institute. Unlike Alibaba’s grand market entrance, Professor Ma’s journey to the Teacher Institute was anything but grandeur: The Chairman failed his university entrance exam not once, but twice. As with other successful entrepreneurs, Ma’s passion and perseverance catalyzed his failure into the pinnacle of business success and dominance.

Often referred to as the "Chinese Bill Gates" and for a good reason, Ma founded Alibaba and all its subsidiaries: Alibaba.com, Taobao Marketplace, Tmall, eTao, Alibaba Cloud Computing, Juhuasuan, 1688.com, AliExpress.com and Alipay.

Based on a filing to the Security Exchange Commission “SEC,” Alibaba revealed 27 owners; and of those 22 people along with Ma are employees. Interestingly, Yahoo owns 22.6 percent of the giant IPO. For fiscal 2014, ended on March 31, Alibaba generated $8.45 billion in revenues and earned $3.75B for the nine-months period.

V. Trading Analytics

Gained 38 Percent in its Public Offering, Demand Indeed Trumped Supply

The global E-commerce, Alibaba's IPOed on September 19, 2014, on the New York Stock Exchange is nothing short of grandeur. The company opened at $92.70 per share and quickly ascended to $99.70; share price leveled off at $92.27.  The IPO trading session revealed that more than 270 million shares change changed ownership, and closed by plus 38 percent premium at $93. 89.

The stock had been receeding since listed on the NYSE; however, share prices seem to stabilized lately.

Share Price Recession of Alibaba, Amazon and eBay

Source: Retail Investor 360 - Premium Research

As of October 20, 2014 Alibaba traded as low as $82.81 and as high as $99.70 since listed on the NYSE. Today, the stock closed at $88.26. On average, there are 34.2 million shares exchanging hands daily. Moreover, there is only three percent institution ownership of the 2.51B shares outstanding.

VI. Financials and Valuations

Our appraisal was based on “integrated investing,” a comprehensive paradigm having elements of both value and growth approach. The new paradigm is the product of the intellectual generosity of legendary investors like Lynch, Buffett, Fisher and Templeton. Morevoer, our approach also emphasizes on averaging of different values and excluding statistical outliers, in achieving more accurate results.

As we’ll discuss, Alibaba—despite much larger in size compared to competitors like eBay and Amazon—seems affordable compared to its peers.

Other “qualitative and quantitative” factors contributing to what Mr. Buffett referred to as the true value or “intrinsic value”of business is crucial to determining the correct value for a company. Therefore, we accounted such factors but they are beyond the scope of this research.

According to Buffett, different analysts using the same data can come up with completely distinct intrinsic values for the same investment. Like Buffett, we will not disclose specificity of calculating intrinsic value for Alibaba Group, more than we already had. Nevertheless, we will provide the following guidance and metrics for readers to run their own appraisal.

To appraise Alibaba; first, we estimated the company’s earnings and multiplied it to the averaged price to earnings “P/E” multibple—calculated from similar companies in the industry. The table at the end of this section listed P/E ratios and other financial metrics for Alibaba and its competitors.

For the second part of the appraisal, we compared those metrics to the stock’s market value, the commonly refered capitalization or “cap” in short. Calculations comparing Alibaba’s estimated values versus its market cap revealed to us whether Alibaba is overvalued or undervalued.

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