Alibaba, Proxies Pull Back As Correction Begins
Alibaba (NYSE: BABA) fever has finally peaked, as shares of the e-commerce leader and its 2 major proxies took a needed breather after a turbo-charged IPO that made it China’s most valuable Internet firm. As a final footnote, the company also made the widely expected announcement that its underwriters exercised their rights to buy additional shares in the offering, officially making it the biggest IPO of all time. But the looming question for now is whether the sell-off on the second day of trading is short-term or the start of a much-needed correction. Regular readers will know my forecast is that the stock is set for turbulent trading over its first month or two, before it moves steadily downward over the next year to levels closer to its IPO price.
It’s relatively rare to focus on a new stock’s second-day trading performance, but such a look seems warranted in this instance after Alibaba’s shares debuted with a meteoric 38 percent rise. We’ll also take a look at the 2 major Alibaba “proxies” — publicly traded companies that hold sizable stakes in Alibaba and therefore had become vehicles for investors to buy into the e-commerce giant before its actual IPO.
Let’s start with shares of Alibaba itself, which shed 4.3 percent on their second trading day to finish the Monday session in New York at $89.89. That’s actually not too bad, since the price is still 32 percent ahead of Alibaba’s IPO price of $68 per American Depositary Share (ADS). As its shares were falling in their second trading day, Alibaba also announced that its IPO underwriters had exercised an option to purchase an additional 48 million of the company’s ADSs at the offering price of $68. (company announcement)
That means Alibaba raised another $3.3 billion beyond the $21.8 billion that it raised through its original share sale, bringing the official total to $25.1 billion. That extra boost is enough to officially make Alibaba’s IPO the world’s biggest of all time, pushing it past the previous record holder, Agricultural Bank of China (HKEx: 1288; Shanghai: 601288), which raised $22.1 through its dual listing in Shanghai and Hong Kong in 2010.
Now that we’ve gotten the records out of the way, let’s look at how the Alibaba proxies did following the company’s trading debut. The 2 biggest of those are Japan’s Softbank (Tokyo: 9984), which holds about a third of Alibaba shares, and Yahoo (Nasdaq: YHOO), which also holds a sizable stake. Shares of both companies had risen sharply over the last year on strong sentiment towards the Alibaba offering. Softbank shares dipped 6.1 percent on Monday in Japan, their first day after the offering.
Yahoo shares fell 2.8 percent on the day of Alibaba’s trading debut lsat Friday in New York, and shed another 5.6 percent on Monday, meaning the stock has lost about 8 percent of its value since the listing. Perhaps even more revealing is the fact that the value of Yahoo’s Alibaba stake is now worth $34 billion, versus Yahoo’s own total market cap of $38 billion. That would imply that Yahoo itself, without the Alibaba stake, is worth just $4 billion. That figure seems a bit low and indicates investors expect Alibaba’s share price to drop a bit more from current levels.
All of this brings us back to the original question of what to expect from Alibaba’s shares in the next year. The company is certainly in a very strong position, but its reliance on the China market for nearly all of its business could quickly become a liability compared to more diversified global rivals like Amazon (Nasdaq: AMZN) and eBay (Nasdaq: EBAY). We’ll also have to see if its profit and revenue continue to grow at the same rapid rates of the past few years. At the end of the day, the company’s current valuation looks unsustainable and is likely to settle down over the next year to the $150-$170 billion range.
Bottom line: Alibaba’s second-day sell-off and retreats for its 2 major proxies hint at turbulence for its share price over the short term, and a longer term correction that will bring its price down 20-25 percent.
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