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.Â 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?