For most of its time in the public view, Alibaba Group Holding Ltd has been able to capture the investor zeitgeist, shaping its asset portfolio to accommodate whatever investors think is sexy at the moment. Business-to-business commerce? Check. Online shopping for consumers? Check. Micro-blogging, social media? There’s Weibo for that. Online payment service? Got it covered with Alipay. Mobile Internet products and services? No problem, UC Web fits the bill. Cloud computing, online entertainment, professional soccer team? Check, check and check.
Alibaba is not so much a company as it is essentially an exchange traded fund for exposure to Chinese technology and commerce.
On the cusp of becoming publicly-traded in the United States, a Bloomberg poll of analysts puts the value of the entire firm at $198 billion. If Alibaba’s syndicate of heavyweights – Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), J.P. Morgan (JPM), Morgan Stanley (MS), and Citi (C) – pull it off, the company’s valuation would join the ranks of IBM, Toyota (TM), Verizon (VZ), and most fittingly, Facebook (FB). That kind of valuation brings with it breathtaking multiples: 53.2 times (March) 2014 year end GAAP earnings, 40 times EBITDA, and 23.4 times revenues.
Nobody would expect an Alibaba IPO to be a bargain, but those levels go far beyond pricing the company for perfection – and this is a company that’s not perfect. Alibaba will be trading on the New York Exchange because first choice Hong Kong exchange couldn’t stomach the insider control over the election of directors. Accounting problems in its media acquisitions have raised questions about effectiveness of Alibaba’s due diligence efforts during its rambunctious, pell-mell acquisition binge. The inside-China ownership/outside-China capital structure creates owners and shareholders with conflicting claims on the firm’s future. And the SEC is still studying Alibaba’s offering documents, pushing the roadshow off for another week.
One curiosity concerning the financial statements is Alibaba’s lack of information for each segment of its business segment information – something that should be critical for those analysts polled by Bloomberg in coming up their valuations. Alibaba’s disparate businesses aren’t all worth the same multiples of relevant yardsticks, and they don’t all grow at the same rate – and it’s impossible to realistically peg one Alibaba business to that of a stand-alone competitor. The firm’s financial statements are prepared on a U.S. Accounting basis, requiring that the firm report essential information about the segments used by the chief operating decision maker for reviewing performance and making decisions about resource allocation. In a firm with an asset palette as widely varied as this one, it’s justifiable to expect at least a couple of different segments. After all, how similar is online commerce to social media?
Alibaba’s one-segment rationale, according to the prospectus: the chief operating decision maker is a “strategic committee comprised of members of the Company’s management team… the Company had one single operating and reportable segment, namely the provision of online and mobile commerce and related services. Although the online and mobile commerce and related services consist of different business units of the Company, information provided to the chief operating decision-maker is at the revenue level and the Company does not allocate operating costs or assets across business units, as the chief operating decision-maker does not use such information to allocate resources or evaluate the performance of the business units.”
No company likes to disclose more than required, least of all segment information. Yet taking Alibaba’s explanation for one-dimension reporting at face value still raises troubling issues. The chief operating decision maker/management committee is using only revenue to allocate resources or evaluate performance. Forget about asset and expense control – the only internal discipline is to grow revenues. Yet shareholders ought to expect more from the managers running their company, such as wise allocation of capital. Don’t expect it if managers are focused only on the top line.
Then again, Wall Street won’t be loving Alibaba because of its managers’ asset allocation skills. It’s going to be all about the growth, no matter what the price. And the lack of meaningful information about the different segments may make valuation guesses just so much Ali-babble.
Jack T. Ciesielski is president of R.G. Associates, Inc., an asset management and research firm in Baltimore that publishes The Analyst’s Accounting Observer, a research service for institutional investors.
