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16 September 2014 By Peter Thal Larsen

Pricing initial public offerings is an inexact science. Predicting how investors will value a large, fast-growing Chinese e-commerce group involves even more guesswork. That makes Alibaba’s decision to lift the maximum price for its upcoming stock market debut by just $2 a share to $68 puzzling.

It’s not unusual for companies listing in the United States to tweak their IPO price range before finalising the offering. What’s surprising is that Alibaba made such a small adjustment when confronted with what people involved in the process describe as “overwhelming” demand from investors. The new ceiling is only 3 percent above the previous maximum. Compare that with Twitter, which priced its shares 30 percent above the top of the original price range, or Facebook, which lifted its price by 9 percent and also sold an extra chunk of stock. Even JD.com, Alibaba’s Chinese rival, priced its IPO 6 percent above initial indications.

The new maximum market capitalisation of $168 billion – $169 billion if underwriters exercise an option to sell some more shares – does not look a stretch. A Breakingviews calculator puts the company’s value at $158 billion. But the higher target would be justified if Alibaba’s e-commerce volumes grow by 35 percent a year for the next two years, rather than 30 percent, or if Alibaba’s operating margin remains at its current level of 43 percent, rather than declining to 40 percent.

Prospective shareholders may be shrugging off some of the factors that ought to weigh on Alibaba’s valuation. These include the untested legal structures by which the company controls some of its operations in the People’s Republic, and governance arrangements that ensure outsiders will have little say in who sits on Alibaba’s board of directors.

If investors are willing to ignore these factors until they become a problem – as they have tended to with other hot technology companies in both the United States and China – they can justify even higher valuations. Alibaba’s modest tweak looks a signal that there is further to go.

 

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