4 Reasons Why Alibaba is Overvalued
Running across an article on Alibaba’s rise via China Law Blog was a bit scary in its presentation of Alibaba as safe investment. Sure, Alibaba is a decent site with a fair bit of money rolling in, and Jack Ma is an entrepreneur that has done quite well. But how is Alibaba selling for more than Starbucks (market caps: $20+ billion vs $20- billion), nonetheless being compared to Google at its IPO in 2004?
To those who believe it’s worth whatever the market says its worth, please indulge me in a little rundown of reasons why Alibaba isn’t worth well over $20 billion:
Why Alibaba is Overvalued
- 300x times current earnings – it takes a lot of real earnings growth to justify such a lofty multiple.
- Little room for expansion (at least in China) – Anyone who wants to be listed on Alibaba is listed on it. The only real new businesses who sign up for it are new businesses.
- Little room for increasing share of current customers – Alibaba, for now, serves one purpose: Linking manufacturers and those looking to source in China. Once the two parties hook up, there is no need for Alibaba to continue their business relationship.
- A Small Moat – The only real thing that Alibaba has going for it is the network effect – there’s nothing special about their brand or the software that runs the site. Or put it another way: Would you have an easier time beating Starbucks or Alibaba with $20 billion in capital?
Sure, a comparison to Starbucks is a bit strange. But so is a $20 billion price tag on a company with a sky high earnings multiple, little way of increased monetization, a relatively small moat, and an already huge marketshare in China (in comparison Starbucks only holds 1% of the non-US coffee market). If you had that much cash ($20 billion) and had to choose Alibaba or Starbucks, which company would you buy?
But that’s just how I see things – what do you think?
I tend to agree with you. Check out my earlier piece on Alibaba.
But also please note that Starbucks’ (which I own)US same store sales actually declined last quarter.
Hey Dan,
Definitely noted – my guess is that same store sales will continue to decline in the States, being of the economy is about to hit the rocks hard persuasion. But overall expansion is doing just fine, and in the worst case they could just stop building new stores and still be making some money in a weak economy.
About the time you wrote that post is when I was considering a Starbucks vs Alibaba post, thought it was stupid, and threw it on the back burner – now I realize two of my arguments for why it is overvalued came straight from you =)
Good analysis. I would add that Alibaba does have plans to expand into other countries such as India. But to my knowledge they have quite a lot of preparation to do before they can start…