This is one week when Alibaba doesn’t want to be tagged on Facebook.
Alibaba’s upcoming initial public offering may be the largest ever and is certainly the most closely watched since Facebook’s in May 2012. The social network’s IPO was troubled from its early days and led to a litigation nightmare for Facebook, its underwriting banks and Nasdaq as the shares plummeted in the months after they floated.
While the Chinese e-commerce giant still faces serious hurdles before declaring success, it is unlikely to repeat Facebook’s missteps. A spokesman for Alibaba, which is expected to begin trading Friday on the New York Stock Exchange, declined to comment.
Facebook ran into problems in the months before its IPO when it touted its strength in mobile usage. What the company failed to mention early on was that it might be tough to generate mobile advertising dollars right away as users shifted from desktops to smartphones and tablets.
While Facebook provided a warning about mobile revenue just before the stock began to trade, the timing of the disclosure flustered some investors. The issue plagued Facebook for over a year as mobile revenue remained disappointing. The stock didn’t rise above its IPO price until late 2013.
Mobile also happens to be a key issue for Alibaba investors. In the June quarter, mobile transactions accounted for 32.8 percent of the company’s total transaction value, up from 12 percent a year earlier.
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But unlike Facebook in 2012, Alibaba has already shown significant progress in turning mobile activity into profit. In the second quarter of 2012, just 0.44 percent of mobile transaction value translated into revenue. But that percentage has steadily increased to 1.49 percent in the second quarter of 2014.
Facebook also had a major hiccup on its first day of trading on the Nasdaq, with some traders waiting hours to find out whether orders had been filled. The confusion may have turned some investors away from owning the stock, which rose only slightly above its IPO price on its first trading day and fell below it during the second session.
Alibaba, on the other hand, has chosen to list on the New York Stock Exchange. While there’s no proof that the NYSE system is superior, it employs human beings to balance out orders alongside computers.
Rich Repetto, an analyst at Sandler O’Neill, said that the NYSE employs a “pause” before trading begins in an IPO to ensure that orders are balanced. “Nasdaq did not have the ‘pause’ in the system when they tried to open Facebook,” he said. “It was an issue.”
Nasdaq has since updated its IPO process to include a human IPO officer who works closely with the deal underwriter. New stocks don’t open for trade in a Nasdaq IPO until the underwriter gives Nasdaq the green light.
All that said, there are some unusual elements of Alibaba’s corporate structure that investors should understand before owning the stock. For instance, investors in the U.S.-listed shares won’t actually own a stake in the Chinese company, but rather in a Cayman Islands-based holding company that has a claim on the profits of Alibaba.
In theory, the Cayman domicile could be abused because local laws there are somewhat laxer than Securities and Exchange Commission rules. Disclosure of material information, for instance, isn’t required as quickly in the Cayman Islands.
In practical terms, a large, high-profile company such as Alibaba is likely to hold itself to a higher standard. Baidu, China’s version of Google, is also a Cayman company and hasn’t run into any major problems linked to its Cayman listing.
But if the scenario arose in which disgruntled investors wanted to sue Alibaba, the Cayman domicile could make a difference, according to Greg Sichenzia, partner at law firm Sichenzia Ross Friedman Ference. “If things go bad, the claim is against the Cayman company,” he said. “For an investor, it could be very frustrating to enforce your rights.”
Alibaba’s valuation looks reasonable but not cheap. The company’s earnings are expected to grow about 30 percent in calendar 2016, based on analyst estimates collected by CNBC. That puts it at a multiple of about 20 times calendar 2016 earnings.
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How does that compare with Alibaba’s peer group? There aren’t many Internet companies in the world, let alone in China, that have a valuation close to what Alibaba’s will be. One possible comparison is Baidu, with a market capitalization of $78 billion. It trades at 18 times consensus 2016 earnings, which are expected to grow 35 percent that year.
While Alibaba has likely avoided a faceplant, investors who buy after the IPO should avoid dreams of instant riches.