INTERNET: Alibaba Stock On Precipice As Lock-Up Ends, Eyes Korea

By newsdoug on March 23, 2015

Bottom line: Many of Alibaba’s older stakeholders are likely to sell some or all of their shares after their lock-up period ends, driving the stock down to or even below its IPO level over the coming months.

Top managers at China’s Alibaba (NYSE: BABA) are almost certainly watching their company’s stock with acute angst this week, even as business continues as usual with word of the e-commerce leader’s latest overseas expansion into Korea. The angst is the direct result of an end to the lock-up period for Alibaba’s stock, which could technically flood the market with up to 340 million shares that were forbidden from trading for the first 6 months after its record-breaking $25 billion IPO.

Put differently, all of those shares would be worth about $29 billion at Alibaba’s current price, accounting for more than one-tenth of its total market capitalization of about $210 billion. The shares officially become eligible for trading when the lock-up period ends on Wednesday, March 18, which is exactly 6 months after the shares made their trading debut on the New York Stock Exchange. (Chinese article)

Obviously none of Alibaba’s big investors are openly discussing plans for their stock, but I suspect that many will move quickly to sell some or all of their holdings to lock in huge gains they’ve made over the last few years. Some of those companies could include names like Japan’s Softbank, which was one of Alibaba’s earliest shareholders, as well as Russia’s Digital Sky Technologies (DST) and Singaporean sovereign wealth fund Temasek, which purchased their stakes much later but have still seen their value grow sharply since then.

Investors were surprisingly sanguine just before the lock-up was set to end, with Alibaba’s shares rising by a small amount during the regular trading session on Tuesday before falling by a similar amount in after-hours trade. The shares have already come under extreme pressure since the beginning of the year, after one of China’s top business regulators criticized Alibaba for the large volume of counterfeited goods traded on one of its main e-commerce platforms. The US securities regulator is also looking into the matter. (previous post)

Alibaba’s shares have lost nearly 20 percent of their value since the counterfeit scandal broke in late January, but have been relatively stable since then. I’ve previously said that the scandal itself wasn’t as big a deal as many were making it out to be. Instead, I argued that many opportunistic short-term buyers were using the news as an excuse to dump the shares and lock in profits from the sharp rise in Alibaba stock after its IPO in September last year.

I would make the same argument this time, namely that the big institutional investors are likely to dump many of their shares when the lockup period ends, not because Alibaba is a bad company but simply to lock in the huge gains they’ve made from the investment. The company is roughly equivalent in scale and outlook to Tencent (HKEx: 700), China’s other leading Internet company that has emerged as very skilled provider of online gaming and social networking services (SNS). And yet at their current prices, Alibaba’s $210 billion market value is still around 30 percent higher than Tencent’s similarly rich market cap of $160 billion.

Let’s take a quick break from the lock-up period news to also look at Alibaba’s other latest headline, which spotlights its global expansion strategy. That move will see Alibaba’s popular Tmall online shopping mall and affiliated Alipay electronic payments service move into South Korea, by offering locally-based payment clearance and logistics services to merchants who use the platform. (Chinese article)

That should allow South Korean sellers to set up shops on Tmall, and quickly deliver goods to local customers using Alipay’s payment services. The move will also allow Chinese merchants to quickly move into the market with efficient delivery times by storing their goods in Korean-based warehouses. It will also allow Korean customers to pay using local currency via Alipay. All of this looks quite good, as South Korea is certainly a market with big potential due to its relative wealth and close cultural, geographic and trade ties with China.

At the end of the day this kind of move into Korea is the kind of step Alibaba needs to take to continue its growth story and keep exciting investors about its long-term prospects. But that long-term story will become secondary over the next few months for Alibaba’s stock, which is likely to come under pressure for the rest of the year and ultimately re-approach its IPO level of $68 or possibly sink even lower until its value is more on par with Tencent.