Alibaba Prices High For $168 Bil Value, Nears Biggest IPO

In one of the most hotly anticipated IPOs of all time, Alibaba Group did not disappoint.

The China e-commerce giant priced 320.1 million shares at 68, the high end of its upwardly revised range.

The initial public offering raised $21.8 billion, making it the largest-ever U.S. IPO and giving it a market valuation of $168 billion — above Amazon (AMZN) but below Google and Facebook. Alibaba stock will begin trading on the NYSE Friday morning If the underwriters exercise an option to sell an additional 49 million shares, as seems likely given the strong demand, Alibaba (BABA) would raise $24.3 billion and replace the 2010 IPO of Agricultural Bank of China as the world's largest ever. The biggest U.S. IPO previously was the $19.7 billion raised by Visa (V). The largest tech IPO, Facebook (FB), raised $16 billion.

Alibaba initially revealed IPO plans on May 6, setting off a continuous drumbeat of media reports at a level not seen since the IPOs of Google (GOOGL) in 2004 and Facebook in 2012, if not more so.

Worthy Of Expectations?

The hype over Alibaba stems from it being the largest provider of e-commerce services, by a large margin, in a country with the most Internet users globally even though the population is only half penetrated by the web.

"There has been a lot of hype of the magnitude we saw in 1999-2000 and everyone is excited about it," said John Fitzgibbon, principal at IPOscoop.com. "But Alibaba is a real company with actual revenue and it's profitable.

For the year ended March 31, Alibaba reported revenue of $8.46 billion, up 52% from the prior year. It reported EPS of $1.61, up 180%. It processed $296 billion in gross merchandise volume, which was more than Amazon and eBay combined, for the 12-months ended June 30. It has more than 279 million active buyers and 8.5 million sellers on its three main e-commerce sites.

Early Thursday, research firm IPO Boutique said its channel checks revealed Alibaba's IPO had "absolutely overwhelming demand." Its sources indicated as few as the top 50 institutional accounts could get upwards of 80% of the IPO. By focusing the allocation so narrowly to large institutions, the intent is to prevent volatile trading of the stock in the weeks to come, it said.

A report by Morningstar on Wednesday assigned a "fair value estimate" on Alibaba of 90 per share, based on revenue growing at a compound annual rate of 32% and operating margins expanding to 50.2% from 47.5% over the next five years.

IPO Price Seen As Cautious

"Perhaps learning lessons from Facebook's IPO, Alibaba's current pricing range strikes us as conservative, and we do not believe the valuation fully reflects the features that make the Alibaba investment story unique," according to Morningstar analysts R.J. Hottovy on Wednesday.

"We believe the IPO is most appropriate for investors with higher risk tolerance looking to increase their exposure to China's emerging middle-class consumer base and its online commerce, mobile commerce, technology, and logistics industries.

Though the IPO raised $21.8 billion in total proceeds, the amount going to Alibaba will be closer to $8.2 billion. About 62% of shares were sold by insiders, from whom Alibaba will not get any IPO money.

SoftBank, the largest shareholder with a 34.4% stake, had no plans to sell shares. Yahoo (YHOO), with a 22.4% stake, was expected to sell 140 million shares, about 26% of its total stake.

Alibaba was vague about how it planned to use its proceeds, citing just "general corporate purposes.

But company founder and Executive Chairman Jack Ma has made clear his plans to be a global company, with eyes on the U.S. and Europe. Alibaba has made multiple investments in U.S. Internet companies starting in 2010, including e-commerce firms that would compete with Amazon and eBay (EBAY).

Alibaba still faces a formidable rival in China in Tencent Holdings (TCEHY), which dominates social media and messaging.