After the Friday of 19th September, the company which is on everybody’s mind is none other than Alibaba Group Holding Ltd. (NYSE:BABA). This emerging market’s enterprise has created a history in the NYSE by the launch of the biggest Initial public offering (IPO) in the US history by raising a whopping $21.8 billion. This Chinese e-commerce giant’s listing on the American Exchange is being seen as a triumph for the Wall Street Exchange as they were able to steal this key player from the Hong Kong markets. Consequently, the enthusiasm for Alibaba’s IPO has been enormous in the American markets, which has led to the breaking of all other previous IPO records in NYSE and probably giving sleepless nights to the top executives at eBay, Amazon and PayPal as Alibaba is posing a serious threat to the their stronghold in US and non-chinese markets. The highest priced IPO before its launch was of VISA Inc. (NYSE: V) of $17.9 billion in 2008 which Alibaba has now far outpaced. Hence, the investors have become so enamored to cling this deal that they are actually forgetting that the term IPO in context of this stock stands for “It’s possibly overpriced”.
The factors making Alibaba an overhyped and overpriced issue
The overwhelming response and the record money raised by Alibaba Group gave it an opening valuation of $168 billion prior to even a single trade of its stock was made which was much higher than the current market leaders of the NYSE like Amazon.com Inc. (NASDAQ:Amazon), The Walt Disney Company (NYSE: DIS) and VISA. Till the time it was available for the trade to the public, it was already up by 36% ($92.7) which made its market cap reach to a colossal $225 billion and that is about 36 times more than its earnings. This clearly indicates that the company insiders and executives who owned this stock, were in huge profits before it could float in open markets and amidst this hype of the stock reaching to such a high value at the time of opening only, the investors really forgot that they were being lured in by the company on hollow augurs of stock rocketing to double the value of its IPO price in no time. Rather, if this would have been the case then unlike Google Inc. (NASDAQ:GOOGL), Alibaba would also have a market capitalization of $400 billion; but the reality is that Alibaba’s market potential is much less than what many unrealistic adherents foresee.
Furthermore, the investors would have got a much insights about them being carried by this IPO if they would have gone through the prospectus of the company rigorously, and hence got a better understanding of the risks involved in investing in it. According to the legal paper works of Alibaba, investors aren’t being actually granted the control of the company because that rights are already locked off with a group of insiders who have all the powers although they are just a minority holder of the company’s capital. Along with it, the Alibaba partnerships comprising entirely of the managers from the Alibaba group with Jack Ma – now the second richest person in ASIA with personal wealth of $26.5 billion – being the epicenter of the cobweb of these interrelated firms hold the soul right to nominate candidates for majority of the board seats without the need for any additional shareholder approval. Hence, because of these daedal business structure and intricate ownership framework, Alibaba had to face a clear rejection from the Hong Kong Exchange for its listing inspite of being a a synonymous with e-commerce in China. Nor did Alibaba chose NASDAQ which is always seen as friendlier to tech IPOs and to companies with multiple share classes but instead got listed with the old-school New York stock Exchange.
China in no plans of providing leverage to foreigners to control one of its biggest company
The world is quite familiar with the obsessive censorship strings of China along with the huge political risk involved in doing business in this nation and this policy has not been overshadowed by this largest socialist state in the case of Alibaba even. Following these norms, the investors are allowed to buy shares in something called a variable interest entity that has a claim on the company’s revenue. This VIE is registered in the Cayman Islands which is regarded as the abyss of the offshore money. Hence, despite of being the home favorites, foreign players have become a mere puppet with all the strings in the hands of the Chinese government.
All these factors are a clear indication for the investors to invest cautiously in this stock. However, this irrational hype during the listing of such tech companies is not at all new because in 2012, Facebook also had put in everything for its IPO to be enormously hyped but in the end landed to a disastrous debut on NASDAQ which till now has not been true with the launching of Ma’s venture as its IPO closed the day’s trade without any hitches and glitches on the NYSE. Alibaba’s initial P/E of 44 is less than half Facebook’s initial valuation of 100 times earnings in its IPO, so in the long term it may prove to be a lucrative investment but taking into account its first day trading this stock looks a bit fizzy.
Patience to be the deciding factor how well Alibaba could buck the big float trend
The potential of Alibaba is immense because it’s a company generating enormous sales revenue of $7.3 billion and its 500 million plus subscribers definitely make it stand apart from the league, but taking the case of its IPO, the biggest question that prevails is how much the investors would wish to spend for this growth. However to a great extent, Alibaba’s IPO has initiated a new step in the process of making China a dominant player in the e-commerce sector but the stock’s movement in the next three to four months would only decide whether this hype is justified or like the lines of Facebook it would also have to play the game of snakes and ladders to tank its growth. At the moment the legendary emerging market investor Mark Mobius at Franklin Templeton Investments has also advised the long term investors to stay away from this overhyped IPO and let the momentum investors just bet on their own bullish or bearish speculations.
In the below video Mark Mobius explains why does he think that Alibaba stocks are really over hyped: