It’s the $24 billion question on Wall Street: Will Alibaba Group Holding Ltd.’s huge initial public offering be a bargain for investors?
With about a week to go before the deal, the army of banks hired by the Chinese e-commerce company is trying to convince fund managers that its shares are cheap given Alibaba’s growth potential and future profits.
Their pitch: Alibaba could start life as a public company at a valuation that is about 24 times its projected 2015 earnings, people familiar with the conversations said. That is below the 29 times currently commanded by Chinese Internet rival Tencent Holdings Ltd. 0700, +0.57% TCEHY, -0.55% The discount is bigger when Alibaba is compared with the valuation of more than 35 times for Facebook Inc. FB, +0.63% the largest technology company to stage an IPO in recent years.
The potential pricing gap matters because many investors expect Alibaba, which operates online marketplaces and sells services to businesses that use the markets, to command a valuation on par with those companies once it begins trading. As a result, those who buy early could be sitting on a nice profit within days of the IPO, which could raise more than $24 billion.
But the math isn’t straightforward. It’s based on the banks’ own analysts’ forecasts for Alibaba’s earnings growth. And Alibaba can still decide to boost the price of shares sold in its IPO, increasing its valuation.
What’s more, at the valuation currently being discussed, Alibaba would be more expensive than more-established and better-known companies such as Google Inc. or eBay Inc. EBAY, -0.82%