With 49 percent of securities professional looking to own a piece of the world’s largest e-commerce conglomerate, Alibaba is what we are going to be talking about for the next few weeks. Some analysts are beating the crowds, and PYMNTs has organized the top 15 or so most interesting picks and predictions running up to today’s show on the New York Stock Exchange. Check out a chance to see the shape of things to come.
If it seems like everybody’s talking about Alibaba today, that’s very close to true: 49 percent of securities professionals said they’re interested in owning the stock, according to a poll by brokerage ConvergEx Group.
Ironically, the one group that can’t officially talk are the big banks that are leading the IPO: Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citigroup. Unofficially, sources say analysts at those banks recently forecast that Alibaba’s profit will grow from $2.3 billion in the first half of 2014 to between $6 billion and $7 billion for all of 2015, with growth continuing at 30 percent a year. That means Alibaba’s revenue could reach $20 billion by 2016, the Wall Street Journal reported.
Analysts at Bank of America Merrill Lynch and Sanford C. Bernstein, which aren’t Alibaba underwriters, forecast similar numbers: a profit of $6.5 billion for Alibaba next year and a potential market value for the company of more than $200 billion.
Gil Luria, a stock analyst at Wedbush Securities, would be “very comfortable recommending” Alibaba at $68 or even $70, according to U.S. News. While the stock has pitfalls, “potential investors are accepting a higher level of risk for a higher level of reward,” Luria said. “The IPO of Alibaba will reflect well on the rising Chinese middle class and the Chinese consumer economy.”
Santosh Rao, head of research with Manhattan Venture Partners
“If it opens around $70 I would take it. I think it is very overpriced at $80 if you are one of the retail traders,” Santosh Rao, head of research with Manhattan Venture Partners, told U.S. News. “I don’t expect a share price of $100 or $120 right off the bat, but it will go there eventually. It’s growing at a 50 percent clip — can they maintain that rate?”
Majd Kitmitto, senior investment analyst at Aston Hill Financial in Toronto, told Bloomberg that the market will be able to absorb the large IPO. “As long as you have global central banks driving this liquidity, you’ll see a race to stocks and a race to growth. And, when you have such a large, liquid mega-cap company coming to market, there’s going to be demand.”
Gongwen Peng, director of quantitative research at Roosevelt Investment Group, told Bloomberg, “We went to this show simply because this is one of the biggest IPOs. We had to stand in a separate room where we could watch the roadshow on TV. I didn’t even get to see Jack Ma in person.”
But Randy Bateman, chief investment officer of Huntington Asset Advisors, warned that the overall market might suffer in the short term as investors make room for Alibaba by selling other stocks. “People want a piece of that pie,” Bateman told Bloomberg. “In order to not screw up holdings and sector weightings, people are letting go of other tech stocks.”
Mohamed El-Erian, chief economic adviser at Munich-based Allianz SE, also warned in a Bloomberg View column that the IPO is so big it could trigger a selloff. ““Given that most investors don’t know as yet how many shares they will receive, most of the selling wouldn’t materialize until quite far into the IPO process. The combined effect could be quite significant.”
But Brian Barish, president of Cambiar Investments, doesn’t see that happening “outside of a very narrow window.” He told Bloomberg, “The markets are big enough to take it. That should hardly break the markets. As for social media and tech names, it is a bit more of an elephant in the swimming pool.”
Trip Chowdhry of Global Equities Research sounded a bearish tone in a note to investors on Tuesday, arguing that Alibaba will have a tough time maintaining its imitation strategy in the face of innovative global competitors like Amazon, Google, Facebook and Twitter. “Our research currently indicates that Alibaba will very likely struggle with its international expansion, as in international markets the rate and pace of innovation is an order of magnitude different from that in China,” Chowdhry wrote. “The recipe of success in international markets is innovation and not imitation.”
Eric Brock, a portfolio manager at Clough Capital Partners, said Alibaba’s growth should be there. “We look at it as a multiyear growth story and also compare it to peers, which also have high valuations for similar growth targets,” Brock told Businessweek. “I’d be comfortable with the shares pricing even a bit above the higher targeted range.”
Di Zhou, an equity analyst at Thornburg Investment Management, plans to buy shares through the IPO. “Valuation is attractive,” he told Businessweek. “They’re telling a real good story about e-commerce. At least they should deserve the same multiple as their peers.”
Brendan Ahern, managing director at Krane Fund Advisors, called Alibaba “a mature company that’s been in existence for 15 years but it’s still experiencing tremendous growth.” It’s “going to benefit from macro tailwinds helping all companies in the space, especially with the continued adoption of the Internet and rise of domestic consumption in China,” he added.
“Alibaba’s been around for a while,” agreed Kevin Headland, director of the portfolio advisory group at Manulife Asset Management. “People are talking about how this might be the 1999 tech bubble all over again when everything launched an IPO. I don’t think this is happening, these are actual solid companies.”
But New York University Professor Aswath Damodaran warned investors in his blog that Alibaba “will remain Jack Ma’s company for foreseeable future and you will have no say in what the company does.” Damordaran — who also referred to Alibaba as “governance by politburo” — said he prefers an indirect investment in Alibaba through shares of Yahoo.
Professor Lucian Bebchuk, who directs the corporate governance program at Harvard Law School, agreed in the New York Times that an Alibaba investment has serious governance risks. “Insiders have a permanent lock on control of the company but hold only a small minority of the equity capital. Then there are many ways to divert value to affiliated entities, but there are weak mechanisms to prevent this,” he wrote. And if the insiders don’t get shareholder approval for their board candidates, they can appoint directors unilaterally. “Alibaba’s structure does not provide adequate protections to public investors,” he wrote.
Rob Lutts, president of Cabot Money Management, adds that “the governance in China is so inferior to the U.S. and that’s a warning sign.” He told Bloomberg, “the bigger picture on the industry and the company is very positive and it’s priced for that, but the average retail investor is not aware of what’s under the covers,” and predicts a better-than-even chance that investors will be able to buy shares at or below the IPO price.
Some fund managers may have to do that too. Channing Smith, a managing director at Capital Advisors in Tulsa, Okla., told Businessweek he’s interested in Alibaba, but isn’t close enough to any investment banks to receive share allocation for the IPO. He predicts the shares will start trading over $100. “With the market sentiment as high as it is, it really has all the ingredients to really take off.”
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