Alibaba IPO Price Conservative say Analysts

Online Chinese reatailer Alibaba is expected to float tomorrow, with an inital share price of $68. Morningstar equity analysts think the shares are fairly valued at $90

R.J. Hottovy, CFA 18 September, 2014 | 11:53AM

Chinese online retailer Alibaba is set to float tomorrow in what could be the biggest ever IPO. Alibaba's long-awaited initial public offering is expected to price on September 18 and trading set to begin the next day. The company recently raised its price to between $66 and $68 per American depository share (ADS) compared with its initial $60-$66.

Perhaps learning lessons from Facebook's IPO, Alibaba's current pricing range strikes us as conservative, and we do not believe the valuation fully reflects the features that make the wide-moat Alibaba investment story unique. Based on 2.5 billion shares outstanding after the offering (assuming underwriter options have been exercised) and a discounted cash flow-derived equity value of $223 billion, we assign Alibaba a fair value estimate of $90 per ADS.

Nevertheless, we acknowledge that there are several geographic, regulatory, and corporate structure risks inherent to investing in Alibaba, which are reflected in our high uncertainty and poor stewardship ratings. As such, we believe the IPO is most appropriate for investors with higher risk tolerance looking to increase their exposure to China's emerging middle-class consumer base and its online commerce, mobile commerce, technology, and logistics industries.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

R.J. Hottovy, CFA  is a director of equity analysis with Morningstar.

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