As Alibaba files for its US IPO, analysts everywhere are engaged in a great game of valuation forecasting. What is Alibaba really worth?

We have seen every technique cited - from cash flow projections and comparables to synthetics pricing and grey market trading. Thus far the low-end of forecasting has put Alibaba at $80-100 billion. The majority of estimates are in the $150 billion range. A few analysts are making headlines with predictions of $250 billion and above.

However, behind all these projections and fancy (i.e. questionable) techniques, there are really only a couple of real fundamentals to consider.

Most of the current discussion centers on Alibaba’s current earnings and future revenue projections. From Yahoo’s statements (they own 24% of Alibaba), we know Alibaba had net income of $3.52 billion on revenues of $7.95 billion in 2013. The net margin was 45%, which is pretty amazing. So projecting all this forward looks great – especially if you assign a high growth rate.

The rest of the discussion tends to be speculation about how big Chinese e-commerce is going to be in 3-5 years. McKinsey & Co. has published reports stating the market will be between $420 billion and $650 billion by 2020. And as Alibaba dominates B2B, B2C and C2C in China, that gives you some big revenue predictions. They additionally have 50% of the e-payment market with Alipay. Projecting those forward with a high PE gets you valuations in the $150 billion range. Note as I am writing this Facebook is trading at a 75 P/E and Greenlight’s David Einhorn is calling this a “second tech bubble”.

Here’s the problem with all of this. Value ultimately follows from competition - and the competitive landscape in Chinese e-commerce is fundamentally changing right now. That makes a lot of this analysis meaningless.

There is a currently a frenzy of deal activity in China’s Internet space. Baidu, Alibaba, and Tencent are buying companies almost on a weekly basis. This frenzy is largely about the shift from PC to smart phones and how this is changing the competitive barriers. It is a transformative change in the Chinese internet landscape and everyone is scrambling.

This transformation is what is letting Alibaba jump into various new online sectors such as portals, media, location-based services and social media. It is also opening the door to invasions of offline sectors such as finance, retail and transportation. You can see Alibaba (and the others) doing deals on an almost weekly basis against these opportunities.

But this transformation is also exposing Alibaba’s core business to new competition. And that is a problem for the IPO. The attractive earnings and growth everyone is modeling could easily change. What happens to the valuation if Alibaba loses 20-30% of market share in C2C or B2C?

Within the discussion of Alibaba’s valuation, I believe there is a lack of appreciation of how volatile and ruthlessly competitive the Chinese Internet space is right now.

All this brings to mind Tencent. They have the capital, the technology and the talent to seriously impact Alibaba’s value. First, they have a dominant position in smart phone usage – which is the future and exactly where Alibaba is fairly weak. Second, they have a significant ownership stake in #2 e-commerce player Jingdong (18% B2C market share). If any company can take 20-30% market share from Alibaba in the next 2-3 years, it is Tencent.

Ultimately Alibaba’s valuation will depend on its market share, its margins and its return on capital. Tencent can impact all of these.

If Tencent moves aggressively after Alibaba, they will be forced to drop prices to defend (goodbye margins). And they will be forced to invest heavily (goodbye ROIC). How likely are they to maintain an 80% market share and high margins in this scenario?

So yes, Alibaba will remain #1 in Chinese e-commerce. But their market share, margins and required capital expenditures are now exposed to a level of competition they have not seen in many years.

My view is that we are only at the very beginning of the story for both Tencent and Alibaba. When you look at all the supply chain that uses internet technology as well as the new markets that are opened up by the internet, E-commerce is actually only a small portion of the total Chinese internet GDP. Things are going to look very different in a few years. Good luck modeling that.