Don’t buy Alibaba stock: ‘Dean of Valuation’

Valuation king says don't buy Alibaba
Valuation king says don't buy Alibaba   

Investors should steer clear of Alibaba, valuation expert Aswath Damodaran said Wednesday.

The Chinese e-commerce giant is expected to go public Friday, selling 123 million of the 320 million American Depositary Shares at an expected price range of $66 to $68.

On CNBC's "Fast Money," Damodaran, a professor of finance at New York University's Stern School of Business, noted that he was looking at Alibaba stock from the perspective of a long-term investor, not a trader, adding, "I wouldn't have bought Twitter at any of the prices it's been offered at."

Damodaran, known as the "Dean of Valuation" for his expertise, said that it was the first initial public offering where the pricing range was close to his own estimate of a company's worth. "And the first reaction that I had was, 'What did I do wrong?'"

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Representatives from Alibaba Group arrive for the company's roadshow meeting in New York September 8, 2014.
Brendan McDermid | Reuters
Representatives from Alibaba Group arrive for the company's roadshow meeting in New York September 8, 2014.

"But I think the fact that there's so much on the ground that you can value makes it easier to price a company like this than a company like Twitter," he said. "It's an incredible profitable franchise, and I think it's worth a lot of money. But I think that's why the pricing was a little easier as well."

To Damodaran, the structure of the company's shares to be offered on the New York Stock Exchange was troubling and a reason not to buy Alibaba stock.

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"Because I'm not getting a piece of a company," he said. "I'm getting a piece of a shell that owns a company where a politburo, basically, sets the board of directors. And if you're a trader, you really don't care. I mean, you're going to be out in six months or three months. What do you care that Jack Ma has power for life? The way I see it, traders date companies, investors marry companies. If you marry a company, you've got to be in here for the long term, and it scares the heck of me that I have absolutely no power over how this company will be run, or what can happen in the future."

CNBC Explains: What's inside Alibaba
CNBC Explains: What's inside Alibaba   

Ma, 49, a former schoolteacher who founded Alibaba in 1999 and will serve as chairman of Alibaba Group Holding Ltd., will retain a 7.3 percent stake.

Damodaran said that the company's structure was tough to take into account when evaluating Alibaba.

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"Corporate governance is actually very difficult to bring into a discount trade because it's a fear that something bad will happen and you can't come out of it," he said. "And when you have a well-managed like Baidu or Alibaba, it's very difficult to actually build it into a discounted cash-flow valuation. So, it's almost an afterthought. After you've done the valuation, it becomes your margin of safety. How much of a discount would I need to be offered to be OK in Jack Ma's outhouse while paying five-star hotel prices? Because it's not that I would not buy Alibaba at any price, but to pay fair price and get treated as a second-class citizen strikes me as not a good deal."

Damodaran also said that Alibaba's connections have already priced in, while its business model on a global perspective has not been proven.

"The fact that they have a 75 percent market share is not just because Alibaba is a great company. It's because they know the right people in the right places. So, the connections are actually built in," he said. "And my fear is there are people building this expectation that it will become this global technology company, and I see no evidence of that yet. I mean, it's actually become more China-focused in the last year than less China-focused. It's never been a particularly innovative company.

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"This isn't Google. It's a merchandising company that does it really well, has made a lot of money in China, but there's nothing they've done that would lead me to believe that I can attach a $250 or $300 billion value, which is what I would get if I gave a global technology premium today. I don't see those pieces in place yet."