Jack Ma, founder of Alibaba, smiles during the company’s IPO at the New York Stock Exchange, Friday, Sept. 19, 2014 in New York.(Photo: Mark Lennihan, AP)
Alibaba, BABA the Chinese e-commerce giant whose magical name and real-world business prospects inspired frenzied interest for months ahead of its record-setting initial public offering, surged more than 35% in its delayed debut Friday on the New York Stock Exchange.
Order imbalances over the intensely hyped, widely sought Alibaba IPO delayed initial trading by more than two hours. American depositary shares of Alibaba Group Holding Ltd., priced at $68, opened at $92.70 once trading finally got under way at 11:53 a.m. ET. Shares quickly jumped to $99 before settling back to about $93 in noon trading. More than 100 million shares traded in the first 20 minutes of trading.
Early indications had shares opening at $80 to $83, but demand was so strong, the offering price had to be revised eight times.
Scott Cutler, NYSE’s global listings chief, said the IPO was repeatedly delayed by massive order imbalances.
"We’ve got hundreds of thousands of orders,” Cutler told CNBC after an hour-long delay. "We’re chasing to find sellers. Even at these levels, there doesn’t appear to be a lot of sellers."
"There’s a lot of hype over this stock. An $80 price is not unreasonable – demand could stampede the price,’ notes Drew Dorweiler, a Montreal-based business valuation expert with Dartmouth Partners and a trustee of The Appraisal Foundation. "The fundamentals are there for incredible volume and excitement."
The IPO raised $21.8 billion, surpassing the $17.8 billion raised by credit card marketer Visa’s 2008 IPO and Facebook’s $16 billion IPO in 2012. Alibaba’s IPO falls just short of the record $22 billion raised in Hong Kong and Shanghai by Agricultural Bank of China’s 2010 stock offering. But given Friday’s demand, Alibaba’s underwriters could add additional 40 million shares, bringing the IPO to $25 billion.
At current price levels, Alibaba’s market capitalization is greater than IBM and Procter & Gamble.
Alibaba’s business model – unlike other young Internet-focused companies with more prospects and buzz than actual earnings and revenue growth – created swelling demand for its shares.
A holding company that combines the sales, merchandising and financial services reach of Amazon, eBay and PayPal, Alibaba had revenue of $8.5 billion in its last fiscal year, up from $5.5 billion in 2013. Revenue for the second quarter ended June 30 jumped 46% to $2.53 billion and net income jumped 137% to $2 billion.
Governance experts, including Harvard University’s Lucian Bebchuck, have warned of the "serious risks" tied to Alibaba, mostly over the grip insiders have. But most investors have shrugged off governance concerns over Alibaba’s lack of independent directors and 30 managing partners, who have the right to nominate a majority of directors.
A successful pre-IPO roadshow seemingly allayed concerns, and demand for shares prompted the company on Monday to raise the IPO’s price range to $66 to $68 a share, up from an initial $60 to $66. Most shares were allocated to large institutional shareholders, not individual shareholders. Alibaba options will begin trading Sept. 29.
Company insiders and early investors will be able to cash out today, unfettered by typical pre-IPO lockups.
Billionaire founder and executive chair Jack Ma, the diminutive former English teacher who started the company from his one bedroom apartment in 1999, plans to sell about 6% of his stake, or about 12.8 million shares. He’ll remain Alibaba’s biggest individual shareholders, with a 7.7% stake.
Speaking to CNBC ahead of trading, Ma said the IPO would not change the culture of the company.
"I don’t want to disappoint shareholders. I want to make sure they’re making money,” he said. "I worry about making my customers happy."
Japanese wireless carrier Softbank,an early Alibaba investor,which provided the then-startup with $20 million in 2000, has a 37% stake in Alibaba that could be worth more than $60 billion. But Chairman Masayoshi Son, an Alibaba director, reiterated that Softbank will hold its shares.
"Alibaba still has lots of growth opportunities inside China. But overseas is yet another horizon of opportunities. This IPO will give lots of opportunities for expansion."
Yahoo! could be among Friday’s biggest Alibaba winners. The company has previously said it plans to unload about 5% of its 22.4% Alibaba stake.
Yahoo! gained was up 1% to $42.44 in morning trading. Canter Fitzgerald’s Youssef Squali raised his target price to $43 from $39, saying Yahoo! should gross about $9.5 billion from the Alibaba stock sale.
Squali also initiated coverage of Alibaba with a buy rating and set a $90 price target.
Others aren’t so sure Alibaba is a buy at current levels.
"There is no way of knowing," says money manager Gary Kaltbaum of Kaltbaum Capital Management. "It is random on whether it is buyable up here."
But Kaltbaum stresses that the strong IPO is a sign that investor enthusiasm is rising along with the IPO’s pre-market price hype. "We have a greed based market this second, not fear based, so I wouldn’t take higher prices off the table," he says, adding that buying shares at these high levels are "risky."
"There is a ton of stock that could be sold at any time by insiders, and very often, frothy opens get sold off," Kaltbaum says.
At current levels, Alibaba’s valuation is less attractive than it was at $68, says Alan Skrainka, chief investment officer at Cornerstone Wealth Management.
"Alibaba seems to have a sustainable business model with a very bright future," says Skrainka. "The real question is what is the proper valuation for the company. At $68, the stock traded at 29 times forward (12-month) earnings projections. At $90, the stock trades at 38 times forward earnings. That’s a pretty full valuation for Alibaba. Anyone buying today will likely need to hold for the long term to make money in the stock."
Dorweiler warns that Alibaba shares should be volatile going forward.
"It will be interesting to see if there’s a bit of a correction in the stock price. A lot of people are steering clear for several days or weeks, just to see what happens," Dorweiler says. "The company is a winner with global growth potential. It could be a $100 stock sooner than later. But there could be volatility over the next few trading sessions."
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