Can’t get in on Alibaba.com’s IPO? Buy Yahoo instead

Alibaba.com, China’s largest B2B commerce site is going public in Hong Kong in a few weeks. With the current frenzied market back drop, and Alibaba’s tremendous earning power (Goldman Sachs’ analyst pegs the site will earn a net profit of USD $83.8 million this year, up 186 percent from last year), the IPO will no doubt be a roaring success.

Sounds great, so where can we get some allocation? Well, that’s the thing, there will literally be trillions of dollars chasing this deal pre IPO, and even with Shanghaiist’s far reaching guanxi, the prospect of our grabbing some coveted shares is pretty much nil.

Thanks for nothing!

Nah, do not despair, there is perhaps a workaround. Buy shares of US traded Yahoo (YHOO) to get in on some of the Alibaba love. Let us explain. In 2005, Yahoo forked over US$1 billion for a 40 percent stake in Alibaba Group, the parent company of Alibaba.com, owner also of Taobao.com, Alipay.com and Yahoo China. Never heard of Taobao and Alipay? They are the Chinese equivalents of Ebay and Paypal, both with 80 percent plus market share. The upcoming IPO is only for Alibaba.com, and the offering price values the site at roughly USD $6 billion. So, even if Alibaba’s share trades flat once public, and the other internet properties in Alibaba’s parent company are completely worthless. Yahoo has already pocketed USD $1.4 billion from its 2005 investment. But a more realistic valuation would put Alibaba Group’s worth much higher. Baidu.com, China’s other internet juggernaut sports a USD $11.5 billion market cap, and it is projected to make USD $77 million this year, up 105 percent from 2006. So, Alibaba.com with a higher earning profile should be worth at least that much. Taobao, Alipay, and Yahoo China combined should fetch no less than USD $3 billion(probably a lot more), which puts Alibaba Group’s market cap north of USD $15 billion and Yahoo’s 40 percent stake with a USD $5 billion plus gain in two years. Got all of that?

Yahoo’s own market cap however has actually gone down a few billion dollars since its Alibaba investment. There are of course several moving pieces in Yahoo’s story, not the least of which is search rival Google’s meteoric rise at Yahoo's expense. But a swing of USD $10 billion in the company's market value (factoring in its investment gains) just doesn’t add up. Alibaba.com’s upcoming IPO could act as a catalyst to unlock the value in Yahoo’s investment portfolio, which also covers Japan and South Korea. If nothing else, the hype alone should be good for a few bucks. So, those of us that are shut out of Alibaba’s Hong Kong debut, let’s party it up on Yahoo.

Alibaba.com will begin its Hong Kong listing on November 7.

Jay Sheng is Shanghaiist's Business Editor. Email tips, news and gossip about business in Shanghai and China to biz at shanghaiist.com.