Investing 102

[Sieg]

I looked at an Alibaba home page for the first time Saturday night and my initial impression was blah......

This report contradicts my impression.

By Tim Mullaney
Even for veterans of the tech-IPO scene, the Alibaba deal is an eye-opener. The Chinese e-commerce giant is set to sell $24.3 billion (or more) of stock this week, and there really has never been one like it in the Internet age. Here are five reasons why.
1. This company is profitable like eBay (EBAY) but grows like Amazon.com (AMZN).
For the 15 years I've covered IPOs, there's almost always a choice to make between fast-growing, unprofitable companies and profitable ones with slower growth. Really big deals like Google (GOOG) and Facebook (FB) had both. Alibaba (BABA) is like those, but more so.
Alibaba's sales rose 55% in the fiscal year that ended in March, to $8.46 billion. It grew 46% again in the first quarter of this year. But profit is growing much faster: Last year's $4.02 billion operating profit was up 132%. Before its IPO, Facebook was half the size and its profit margins were narrower, though it grows a bit faster than Alibaba.
The reason for the fat margins is that Alibaba, like eBay, doesn't own the stuff sold on its Web sites. Instead, it takes a cut from sellers who use its platform. Since running the platform is cheap once it achieves scale, gross margins are 71%. Amazon runs about 30%, and eBay is at 68%.
That's why Alibaba's profit grows so much faster than sales. And it's sustainable unless it changes strategy.
2. Chinese Web penetration -- and consumer spending -- are still lower than you may realize.
We know by now that Alibaba's three main Web marketplaces generated $296 billion in gross merchandise sales in the four quarters (eBay did less than $80 billion). The temptation is to assume that this means Alibaba is working in a fully developed market, but it's not.
About 46% of Chinese consumers are connected to the Internet, compared with 82% in the U.S. Chinese consumers' spending comprises 36% of gross domestic product, versus 67% here. And a lower share of Chinese who are online, shop online, than is the case in the West.
All three of those figures will move toward developed world averages. And they will be force multipliers for Alibaba.
3. They make group buying work.
Back in the U.S. Web bubble, Paul Allen funded a group-buying company called Mercata whose CEO told me they would be the biggest e-commerce company in the world. Mercata didn't make group buying work, but Alibaba apparently has.
Group buying aggregates demand for merchants, who in exchange give discounts to people willing to join the group. The closest U.S. parallel to this now is Groupon (GRPN). At Alibaba, the Juhuasuan group-buying market site generated $10.6 billion of gross merchandise sales in the year ending in June. By itself it might be a pretty interesting company, but it's only about 4% of Alibaba.
4. Alibaba is bigger than even established, blue-chip companies.
At its current sales pace, Alibaba will reach the size of U.S. companies like Marriott (MAR), Texas Instruments (TXN) and Nordstrom (JWN) this year. It's bigger than Visa (V). According to Renaissance Capital, at $63 a share it would be the 23rd most-valuable company listed in the U.S., with a $161 billion market value.
That's the reason investment manager Walter Price told MarketWatch's Sital Patel last week that Alibaba was a "mature" company. In a sense, that is true -- Alibaba is no fledgling. But in the normal business usage of "mature" -- a company that already is what it will become, with its primary opportunities already exploited -- Alibaba is anything but.
5. The valuation is surprisingly conservative.
The $66 top of Alibaba's price range values the company at 41 times last fiscal year's earnings. On this year's likely earnings, Alibaba's pre-IPO range supposes about a 25 price-to-earnings ratio. Much lesser Internet companies get much higher multiples. Facebook fetches 48 times earnings.
At $66, this deal is a grown man playing poker online against college kids. A 25 multiple? With a dominant position in an already huge Chinese Internet market that is, at the same time, uniquely underdeveloped? With near-50% operating margins now and economies of scale still waiting to be built? That's why the deal's price will reportedly rise before it closes.
Applying Facebook's P/E, and assuming that Alibaba's 84 cent per share first-quarter profit, inflated by a one-time revaluation of old acquisitions, begets $2.50 for the year, Alibaba's share-price value is $115, plus or minus. Its market value looks like $285 billion, slotting it between Wells Fargo (WFC) and Johnson & Johnson (JNJ)
Sound like a lot? Well, it's a lot of company.
-Tim Mullaney; 415-439-6400; [email protected]

[GregWeld]

Here's my "prediction" on Alibaba....


The "air" will come out of the latest hot stocks --- as the very same people that chase the "hot stocks" will sell their winners (GPRO/TSLA/CMG/AAPL/FB etc) to fund their new buys of Alibaba shares.

It may be an opportunity to buy some shares of these high fliers for you younger guys at a little discount.

[GregWeld]

Originally Posted by GregWeld

Here's my "prediction" on Alibaba....


The "air" will come out of the latest hot stocks --- as the very same people that chase the "hot stocks" will sell their winners (GPRO/TSLA/CMG/AAPL/FB etc) to fund their new buys of Alibaba shares.

It may be an opportunity to buy some shares of these high fliers for you younger guys at a little discount.

If you hang around long enough -- you'll learn that there is a "disconnect" between the SHARES and the actual company performance in certain names. There are many categories of shares -- Momentum Stocks -- is just one of them. They go up quickly -- and they go down just as quickly when the new flavor of the week changes.

This does NOT mean that they're not good companies - that there's anything wrong with owning them - that they won't be good long term investments. What it does mean is "don't think you're smart" when you get in and they run to the moon....

The "smart money" gets in - makes 10 or 20 or 40% and they know when to get out and move on. Then they repeat this process. To me - it's "lemming" investing. Everybody wants to be in the latest hot deal. Lots of money to be made in these... what you don't want to be is in the last group to finally get in. Those are the people that loose while the others line their pockets.

Think about housing. The people that bought at the top still haven't recovered... while those that bought at the bottom have made a killing.

[GregWeld]

Here's some startling numbers!!! As in WOW.....




China had 618 million internet users at the end of December 2013, according to China Internet Network Information Center, or CNNIC; that figure was up 9.5% year on year but still represented less than half the national population, showing clear room for growth.

[toy71camaro]

Interesting topics.. I like it. Makes us think.

The other half just asked if I was going to do anything with Alibabi, cuz its "supposed to be huge". She's been listening to the news. lol.

My response was basically what we've discussed here:
1. Its a gamble.
2. Everyone's hyping it up = scary.
3. Or do I sit back on Babi, and do a small stake in the "old hot stocks" like mentioned above.
4. It's a gamble.
5. All the options above are a gamble. LOL.

None of them fit my Investing 102 profile. But, would it hurt to gamble a couple hundred bucks and "let it ride" and see what happens? Maybe. It certainly ain't gonna kill me and I'm not gonna lose the farm so to speak.

So, I'm still up in the air on the whole thing. Like with any IPO. I'm not big on gambling. lol.

[GregWeld]

The points I've always tried to make here is not -- DON'T GAMBLE -- this is investing 102... beginner investing.

The KEY is to understand what constitutes gambling versus investing.

Once you understand the difference -- and have some investments -- and you want to gamble just a bit.... at least a guy will know that and go into the purchase with eyes wide open. When it does what you thought it would do = Great! When it doesn't -- understand your bet and get the F out....

Originally Posted by toy71camaro

Interesting topics.. I like it. Makes us think.

The other half just asked if I was going to do anything with Alibabi, cuz its "supposed to be huge". She's been listening to the news. lol.

My response was basically what we've discussed here:
1. Its a gamble.
2. Everyone's hyping it up = scary.
3. Or do I sit back on Babi, and do a small stake in the "old hot stocks" like mentioned above.
4. It's a gamble.
5. All the options above are a gamble. LOL.

None of them fit my Investing 102 profile. But, would it hurt to gamble a couple hundred bucks and "let it ride" and see what happens? Maybe. It certainly ain't gonna kill me and I'm not gonna lose the farm so to speak.

So, I'm still up in the air on the whole thing. Like with any IPO. I'm not big on gambling. lol.

[Sieg]

Originally Posted by toy71camaro

I'm not big on gambling. lol.

I see I'm not the only one who's inherently unlucky.

[ironworks]

If you getting in when everyone else is the deal is over.


I bought our house 3 years ago and it has doubled in value in that short time. They couldn't give houses away 3 years ago.

The housing market was so bad Banks boarded up their foreclosures and let them sit for a few years to make some money on them before after everything crashed. Nobody was selling anything.

[GregWeld]

This is a good discussion because of all the recent IPO action... and frankly it also covers any "investment" that would constitute RISK/GAMBLING.


There's many scenarios that would be covered by risk/gambling vs investing.

Let's take Blackberry.... a guy could have gone bottom fishing and bought BBRY down in the $5's... BETTING that it might rise to $6.00 or $6.50

The thing here is to know what you're expectations are -- and have a plan - and know for a fact that you're betting. When it hit's your target, i.e., meets your expectations.... NOW what do you do? You're plan was to skim a quick 20%... do you stick to that and sell -- or now do you feel so smart that you turn your gamble into an investment and hold?

Are you that nimble?

Do you watch the market like a hawk?

Are you able to handle the gut wrenching that goes on if your big bet goes from a gain to a loss?

Did you have the extra cash -- or did you sell a winner to place a bet?

Are you the type that once you've made a bet and it didn't work -- do you make even larger bets trying to make up for the loss?

Once you've made a big score --- are you the type that now abandons INVESTING and turns into a trader?

These are all things most of us can't answer about ourselves until we actually "try". My story here has been to get people to THINK about these things... not to tell someone what or what not to do.

Beginners need to have some success.... and that success is easier and more lasting if they're collecting dividends and seeing some gains regardless of the size... vs losses.

Once a guy has a little cushion and wants to try to make a big quick score -- fire away! I do it all the time - I just don't talk about it here because it's not appropriate and I feel if I mention it - you all will jump in. That's not what I want anyone to do... you need to be comfortable doing these things on your own - not blindly following (lemming?) what everyone else is doing.

[GregWeld]

Personally -- I like to think about what the feelings were when I was broke... it keeps your eye on the ball a little tighter. After having some success -- I never want to experience the broke feeling again. So my RISK taking is a very very small number/percentage. That doesn't mean I'm not taking on some risk now and then. Don't be afraid of it -- but understand it and what fallout you might suffer.

We all go into everything KNOWING we're going to knock the cover off the ball... Trust me -- I've had some HUGE zeros from that. I've also had 1,000's of percents in returns. I wouldn't have the returns at all had I not taken on the risk.

The difference is I'm not playing with the kids college fund - or the emergency fund - or my retirement. Fund those first - when you're satisfied... it's okay to play just a bit.