Prior to the Alibaba IPO the five biggest IPOs of American companies listed on United States stock exchanges were as follows:
VISA, March 2008, $17.9 billion
Facebook, May 2012, $16 billion
GM, November 2010, $15.8 billion
Kraft Foods, June 2001, $8.7 billion
UPS, November 1999, $5.5 billion
Two large previous IPOs of Chinese companies were these:
Agricultural Bank of China, 2010, $22.1 billion
Industrial and Commercial Bank of China, Ltd., 2006, $22 billion
Then came the Alibaba IPO last Friday. With all shares sold on the NYSE plus a few extra to other investors the Alibaba IPO came to $25 billion, the largest ever. What is Alibaba and from the investor’s view point where will Alibaba be in a year?
Alibaba – NYSE:BABA is the technology hub of several businesses.
Alibaba Group Holding Limited is an online and mobile commerce company. The Company operates its ecosystem as a platform for third parties. The Company operates Taobao Marketplace, China’s online shopping destination, Tmall, China’s third-party platform for brands and retailers and Juhuasuan, China’s group buying marketplace. In addition to its three China retail marketplaces, the Company operates Alibaba.com, China’s global online wholesale marketplace, 1688.com, its China wholesale marketplace, and AliExpress, its global consumer marketplace, as well as provides cloud computing services.
In short Alibaba is part of a network of companies that provide internet services in China and to the degree that they can compete effectively, across the world. The description from Google Finance certainly sounds impressive but to ask the question, where will Alibaba be in a year, we need to know more.
The Price of Alibaba Stock
An interesting article, After the Alibaba IPO – the Big Picture, in the New Yorker notes that Alibaba is now trading for forty times its projected 2015 earnings.
At ninety dollars a share, Alibaba is trading at about forty times analysts’ estimates of its 2015 earnings. That’s a higher multiple than the ones attached to some of its rivals in the Chinese Internet sector, such as Baidu, a search company, and Tencent, a social-media company. More to the point: Alibaba’s market capitalization is more than three times the capitalization of eBay, the American company that it most resembles.
It appears that with all of the hoopla surrounding the initial public offering of Alibaba the stock is over-priced. Where will Alibaba be in a year? A fair assumption is that it will gradually fall in price to a fair market value, perhaps half of the current price. Then its stock price will rise or fall based on how well the company is run and how much money it makes. With a normal company stockholders would hold the company management responsible for the results of their efforts. This is a problem with Alibaba!
Who Owns What and Who Controls What?
Oh, what a tangled web we weave,
when first we practice to deceive,
Sir Walter Scott
If you think that when you bought into the Alibaba IPO that you own a piece of the companies in the Google Finance description, think again! Folks who bought into the IPO bought shares in a holding company in the Cayman Islands, Alibaba Group Holding Ltd. The story behind this company and the collection of companies connected to Alibaba is that insiders control all aspects. Shareholders in Alibaba Group Holding Ltd only get a say if the management team including founder, Jack Ma, let them in. Before the IPO we posed the question whether to invest in Alibaba or not. We noted the following:
A recurring issue with investment in Chinese companies is the lack of transparency. The Financial Times published their familiar misgivings on transparency.
Dual-class share arrangements that entrench the control of founders have become a feature of internet investing in the decade since Google went public.
But Alibaba, the leading Chinese ecommerce company, has gone one step further: it has separated ownership from control altogether. The controversial plan, which was rejected by the Hong Kong Stock Exchange, forcing the leading Chinese ecommerce company to seek a listing in the US, was detailed in Alibaba’s hotly anticipated IPO filing on Tuesday.
This issue is why the Hong Kong Stock Exchange refused to list Alibaba. Investors who want to invest in Alibaba and make money should take notice.
Where will Alibaba be in a year? Wherever that is, shareholders will only be along for the ride and will have no say in what to do to correct any deficiencies.