Updated Sept. 15, 2014
Alibaba, China’s answer to Amazon (AMZN), will forgo a listing on the Hong Kong Stock Exchange and instead launch its potentially record-breaking initial public offering on the New York Stock Exchange. Speculation about the Alibaba IPO has pegged the company’s valuation from $130 billion to $170 billion, dwarfing most other public companies in the U.S.
When investment bankers stop taking orders, the Alibaba IPO likely will have raised $20 billion or more and will come in as America’s biggest public offering of all time.
Moreover, I’d put good money on Alibaba’s stock price doubling when it opens for trading. Unfortunately for you, those shares will be next to impossible to acquire prior to the offering.
But that doesn’t mean you can’t get in on the Alibaba IPO. Here are a few back doors into the offering:
Alibaba IPO: The Direct Route
Your best bet is to invest in Alibaba’s biggest shareholders: Softbank (SFTBF) and Yahoo (YHOO), which own 37% and 24%, respectively. Both companies have already seen significant appreciation of their shares in the past year — YHOO is up 43% and Softbank 23%. And make no mistake: Much of Softbank’s outperformance of Yahoo can certainly be attributed to its larger share of Alibaba.
But how much more do they stand to gain once the Alibaba IPO goes live?
If you use a very conservative $130 billion valuation, Yahoo’s stake is worth $31 billion, almost 80% of its current market cap. Sadly, Yahoo could’ve had even more — Alibaba repurchased half of Yahoo’s shares in 2012 for $7.1 billion, generating a pre-tax gain of $4.6 billion for the California company. Looking back, that sale looks like a very poor decision.
Yahoo CFO Kenneth Goldman admitted as much at a recent investors conference, stating, “Forgive me for using hindsight here, but clearly I wish we hadn’t done that.”
Should Alibaba’s shares double on the first day of trading, Yahoo could be looking at an investment worth $49 billion. This calculation assumes YHOO sells a 10% stake for $13 billion, with the remaining 14% stake doubling in value to $36 billion. So it seems likely that Yahoo’s shares will continue to appreciate post-IPO — especially when you consider its existing investment is valued at $1 billion on its balance sheet.
Softbank’s current market cap is $99 billion. Using the same math as above, its investment in Alibaba could be worth as much as $83 billion ($13 billion for 10% sold in IPO and $70 billion on the first-day double).
Considering Masayoshi Son, Softbank’s founder and CEO, paid just $20 million for its investment back in 2000 and is now carried on its books at less than $4 billion (includes all its unconsolidated equity interests), Softbank’s shareholders including Son have done very well.
But again — will they continue to do so?
Reuters corporate finance columnist Una Galani values Softbank’s various businesses at $109 billion, which includes $41 billion for its 37% share of Alibaba. That means Softbank sans Alibaba is worth $68 billion. If Alibaba’s stock doubles on its first day, the sum of its parts would be worth $151 billion — 53% higher than its current market cap.
From an investment standpoint, I consider Softbank to be the better long-term solution because its Alibaba holdings represent a much smaller portion of its overall market cap. Should anything happen to Alibaba in the future, it would take less of a hit than Yahoo.
I’m not saying this will happen, but it’s definitely worth factoring into any decision.
Now, for a couple other options: