Rosenblatt Initiates, Comments on Alibaba (BABA) Ahead of Expected IPO

Rosenblatt Securities started coverage on Alibaba (NYSE: BABA) today.

Analysts Jun Zhang and Martin Pyykkonen made the following key points:

* Alibaba (BABA) has established a competitive dominant position in the still very early stages of ecommerce development across China. Even though BABA already has a strong competitive moat for Chinese ecommerce, there is still a considerable market opportunity runway looking forward. The Chinese ecommerce market has been later to develop than we take for granted here in the U.S. for a variety of reasons (credit card payments, physical goods delivery, etc.) and by most third party estimates, ecommerce still only represents ~10% of total retail commerce transaction volume across China. BABA has an estimated 80% of the total China ecommerce market and is currently larger than both eBay (EBAY) and Amazon.com (AMZN) combined in the U.S.

* Since BABA ultimately chose the NYSE for its stock listing, we think it’s a fitting big picture analogy to compare BABA’s ecommerce business model overall (Taobao and Tmall, specifically) vs. the NYSE, in that each serves as an exchange between buyers and sellers (large and small) while carrying negligible, if any, product inventory risk and while providing somewhat comparable clearing functions. This has also been- and is still fundamentally true- of EBAY’s domestic business model, and the lack of physical inventory risk has been a key margin driver for EBAY (vs. AMZN’s historically low mid-single digit operating margin, due to physical inventory warehousing and fulfillment centers).

* Taobao is currently generating ~70% of BABA’s total GMV, which implies that Taobao alone is generating nearly 60% of China’s entire ecommerce GMV. The key significance of Taobao in the China market is that it is connecting merchants/consumers across what have been sharp geographic boundaries in order to conduct ecommerce with relative ease. For thousands of merchants across China, they now have a sales and distribution channel which is efficient (and had not been realistic from a physical retail standpoint before). China has ~125 cities with a population of > 1 million (vs. 9 such cities in the U.S.), but that statistic still obscures the fact that the majority of the Chinese population is not practically reachable from a physical retail reach standpoint, especially relative to the U.S. physical infrastructure.

* BABA’s IPO is expected to price this week. There will likely be a wide range of revenue, EBITDA and EPS estimates for BABA in the upcoming weeks as wider street coverage is published. We will be focused on adjusted EBITDA estimates and EV/EBITDA multiple valuations on BABA’s stock. The table below shows potential EV/EBITDA multiples on BABA, based on our current EBITDA estimates and a range of valuation scenarios at BABA’s initial pricing. At the current projected pricing, BABA would be valued at an EV/EBITDA multiple within a close range of AMZN and almost 2x EBAY’s EV/EBITDA multiple on C2015 street estimates.

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