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Tags: Hulbert | Alibaba | IPO | Stocks

Hulbert: 'Overheated' IPO Market Makes it Hard to Judge Alibaba

By    |   Friday, 19 September 2014 07:40 PM

Chinese Internet giant Alibaba has experienced a phenomenally successful debut, with shares closing 38 percent higher from their initial offering price of $68.

But Mark Hulbert, publisher of Hulbert Financial Digest, says investors should think long and hard before jumping into the stock.

Many Chinese companies have experienced financial scandals, he notes on MarketWatch. "We can’t rely on the financial, legal and regulatory safeguards in China that we take for granted in the U.S."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

Trading under the ticker "BABA," shares opened at $92.70 and hit nearly $100 within hours. By the end of the day, the stock rose $25.89, or 38 percent, to close at $93.89.

Also, Hulbert warned that it's difficult to know whether the stock market as a whole can continue its five-year rally.

"Asking hard questions is important at any time, of course, but it’s especially true now with the stock market at an all-time high and the IPO market overheated," Hulbert writes.

He also cites a study conducted years ago by Josh Lerner, a professor at Harvard Business School. Looking at 350 venture-capital deals going back to the 1970s, Lerner found that venture-capital firms "appear to be particularly proficient at taking companies public near market peaks."

Alibaba is nearly unknown to most Americans but is ubiquitous in China. The company, which operates China's largest Internet shopping destination, Taobao, and retail site Tmall.com, earned $3.7 billion in the 12 months ended March 31, 2014, up about $2 billion from the prior 12-month period.

The e-commerce company, which started in 1999 with $60,000 cobbled together by founder Jack Ma, is now valued at $231.4 billion. That makes it larger than Amazon.com Inc. and eBay Inc. combined, and more valuable than all but 10 companies in the Standard & Poor’s 500 Index.

Alibaba is valued at 39 times its estimated earnings per share for its current fiscal year, which ends in March. That is right in line with Facebook's valuation of 39 times forward earnings but nowhere near the lofty valuation of Amazon.com's multiple of 264, according to Thomson Reuters Starmine data.

The future path of Alibaba's shares is truly uncharted territory.

"It's very difficult to predict," said Stephen Massocca, managing director at Wedbush Equity Management LLC in San Francisco. "Is it going to trade based upon its true fundamental value, or is it going to become one of these cult stocks a la Tesla or Solar City, or some of these names where there really isn't a fundamental grounding to the valuation?

"And it's very difficult to see what bucket these guys are going to fall into," Massocca told Reuters. "My guess is there's a very high likelihood it does fall into this bucket, which would lead you to believe it does trade higher. But if you were to base it on a fundamental valuation, I would call it slightly overvalued at this price."

Meanwhile, Morningstar analyst R.J. Hottovy likes Alibaba and pegs its fair value at $90. But he has assigned a high uncertainty rating for the company. "The Chinese e-commerce market is still in an early stage," Hottovy said on Morningstar.com.

"There are also regulatory concerns. The [Chinese] government has been known to put some pretty regulations in place." He also gives Alibaba a weak stewardship rating, because minority shareholders will have little influence over the company.

The share sale is already the largest by any company in the U.S., and could break the global record — currently held by Agricultural Bank of China Ltd.’s $22 billion IPO in 2010 — if underwriters issue more shares.

“They want to get in now before the market is no longer excited,” said Kevin Headland, director of the portfolio advisory group at Manulife Asset Management Ltd. in Toronto.

Headland, whose firm manages $281 billion, plans not to invest in the shares right away.

“It’s prudent to sit back and evaluate a company instead of getting caught up in the excitement,” he told Bloomberg News.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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Chinese Internet giant Alibaba has experienced a phenomenally successful debut, with shares rising as much as 47 percent from their initial offering price of $68 Friday.
Hulbert, Alibaba, IPO, Stocks
Friday, 19 September 2014 07:40 PM
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