Alibaba Prices High, Set For Turbulent Trading

Alibaba set for solid debut

With Alibaba’s (NYSE: BABA) blockbuster IPO nearly in the history books, I wanted to take this opportunity to explore what’s ahead for the company as it gets set to break numerous records with its New York listing. One good indicator of what lies ahead would be the performance for shares of other Chinese tech firms that have listed over the last 12 months. But such comparisons have limited value, since Alibaba is clearly in a far different class from all these other companies, following a pricing of its shares that makes it more valuable than such global corporate giants as Amazon (Nasdaq: AMZN) and Disney (NYSE: DIS).

Let’s begin this final Alibaba posting before its trading debut with a summary of the latest developments, led by the company’s IPO pricing. Alibaba finally priced its American Depositary Shares (ADSs) at $68 apiece, higher than its original range of $60-$66, after meeting with extremely strong demand. (English article) At that price the company will raise $21.8 billion, and will get an initial valuation of $168 billion. That figure will make Alibaba China’s most valuable Internet company, taking over the top spot from former leader Tencent (HKEx: 700), which is valued at nearly $150 billion.

Let’s quickly review some of the other records that Alibaba will break, starting with the biggest Internet IPO of all time. That record was formerly held by Facebook (Nasdaq: FB), which raised $16 billion in its Nasdaq IPO of 2012. Alibaba’s total fund raising still puts it behind the world’s biggest IPO of all time, made by Agricultural Bank of China when it raised $22.1 billion from a dual listing in Hong Kong and Shanghai in 2010. But if Alibaba’s underwriters exercise a number of overallotment options, which looks likely, its IPO could easily become the biggest of all time.

Now that we’ve gotten all the facts out of the way, let’s look at what’s ahead for Alibaba in its trading debut, and also what we can expect over the next year as its shares begin daily trading and some of the hype starts to fade. I’ve previously said the shares are likely to get a nice pop in their trading debut and could rise in the 8-15 percent range, mostly due to the residual effects of the nonstop hype that has accompanied this blockbuster deal.

To predict how shares might perform over the next year, it’s helpful to look at how some of Alibaba’s peers have fared since making similar listings over the last 12 months. The company’s 2 closest peers in that regard are (Nasdaq: JD), its closest domestic rival in e-commerce, and Jumei International (NYSE: JMEI), an online cosmetics seller. Jumei has been relatively lackluster since its offering in May, up just 15 percent, while has risen by a more impressive 55 percent.

Other new e-commerce-related Internet listings have fared quite well. Shares of online classifieds site (NYSE: WUBA) and car listings site Autohome (NYSE: ATHM) have both more than doubled since their IPOs late last year. Recently listed shares of social networking giant Weibo (Nasdaq: WB) have been more mediocre, up just 25 percent since their trading debut in April.

Of course many of these frothy gains are in the past, and thus the sentiment they reflect has already been included in Alibaba’s strong recent pricing. All that said, there’s still probably a bit of froth in the market after months of hype surrounding the Alibaba deal, meaning the stock could perform reasonably well in its first few weeks of trading. After that I would expect the buzz to fade substantially, meaning shares could trade sideways and even face downward pressure over the next year until they approach valuation levels similar to those for Tencent.

Bottom line: Alibaba’s shares will perform well initially due to lingering hype from their IPO, but will stagnate and move downward over the next year until they value the company at levels similar to Tencent.

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