Alibaba Group (BABA, Financial), the e-commerce market place giant, is still very much a single-country-focused platform, yet the company keeps growing its sales numbers quarter after quarter. The company posted a 59% growth during the recent quarter, but the stock has barely crossed its IPO price, even though YTD return is at 45%. Let’s take a closer look to see why the stock price kept moving lower since the company went public nearly two years ago.
When Alibaba went IPO in September 2014, the launch was a massive success, bagging the record for the largest U.S. Initial public offering. Alibaba priced its offering at $68 per share and roared to close at $93.89, a 38% surge by the end of its first trading day. The stock price surged for a little while and then, after peaking above 100, the stock edged lower until it reached Alibaba’s originally planned IPO price of $60.
The biggest problem was that Alibaba was grossly overvalued during the IPO.
“Alibaba set the price range for its IPO at $60 to $66 a share, valuing the company at about $155 billion at the midpoint of the range. That would make Alibaba the biggest IPO in terms of valuation, according to data provider Dealogic, exceeding the likes of Visa, General Motors, Facebook as well as several Chinese-listed companies.” - WSJ
Between 2007 and 2014, Alibaba had grown its revenues from a mere CNY 2.16 billion to CNY 52.504 billion, a near 25-fold jump in a relatively short period of time. During the nine months ending December 2013, Alibaba closed with overall sales of $6.511 billion and it was reasonable to expect them to close the year in the $8 to $10 billion annual revenue range, which means the company was valuing itself at more than 18 times its sales. Investors then pushed the company a further 38% above that price point.
BABA IPO Prospectus
Alibaba was indeed growing at a strong pace and it is normal to expect the company to be valued at high levels, as you can see from the graph above. But such a high valuation comes with the expectation that the company can sustain such growth, which did not happen. As a result, the stock was forced down to more realistic levels.
Alibaba is still trading at near 14.4 times its sales and the company is still growing, but the problem is that most of their growth is already priced in. This is a great company and I do think that it deserves a spot in your portfolio, but that does not mean that you buy it with your eyes closed.
If you want to hold the stock for the long term, then BABA makes sense and you can always add as the stock price drops. But if you are in for short-term profit, this is not the stock for you.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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