Alibaba: Bigger Than Walmart?

One of the most anticipated IPOs in the history of the world opened on the NYSE just before noon on Friday 19th September 2014. BABA was priced at $68 per share but indications that the stock would open significantly higher were evident early on Friday morning. American depositary shares of BABA were headed for 40% returns on the opening day alone, as figures of $80-$83 and above were being floated on the live twitter feed from the NYSE. After multiple upwards revisions of Alibaba stock and over two-and-a-half hours of delays, the stock finally went public at $92.70. The reason for the excessive delay was the sheer glut of orders waiting to be fulfilled. Part of the delay was attributed to sellers and company insiders who had been issued shares and were waiting to sell those shares on the market. BABA’s Initial Purchase Offering (valued at $21.8 billion) surpassed VISA’s IPO in 2008 (valued at $17.8 billion) and even Facebook Inc (NASDAQ:FB) 2012 IPO (valued at $16 billion). The company offered 320.1 million shares and the company is now valued higher than Bank of America (NYSE:BAC) and AT&T (NYSE:T).

Analysis of Stock Pricing on the NYSE

Traders interested in purchasing stocks before an IPO starts trading must be aware of the process that needs to be undertaken beforehand. There are several important steps that must be followed before IPO stock goes public. In the case of Alibaba (BABA), there are aspects known as the ‘Human Touch’ and ‘Price Discovery’. The New York Stock Exchange (NYSE) requires transparency and human engagement at every step of the process. The price discovery process is important in determining the price at which a stock will open on the NYSE. This is the price that the stock will start trading at. The most important component of this process is supply and demand. The next process in evaluating the fundamentals of IPOs at the NYSE involves an auction that needs to be run by the Designated Market Maker. This occurs before the stock actually starts trading. During the auction, sellers and buyers of the stock will be positioned on either side of the DMM. In the case of Alibaba, the price range continued to shift upwards from its base of $68 to as much as $93 per share. The price of the stock spiked close to $100 but quickly settled in the $90 - $92 range.

Bigger than Walmart

Confident about his company’s prospects, CEO and Founder Jack Ma proudly proclaimed that he wanted Alibaba to be bigger than Walmart. Traders fortunate enough to cash in on the deal would have found themselves with a big return within a day as the stock surged on the back of strong domestic demand. The company managed to raise $21.8 billion, thereby valuing Alibaba at a whopping $168 billion. Alibaba’s value now trumps other companies like eBay Inc (NASDAQ:EBAY), Amazon.com Inc (NASDAQ:AMZN) and even Cisco Systems Inc (NASDAQ:CSCO). The reason for the surging interest in this company is directly attributed to the marketing campaign embarked upon by Alibaba executives. The IPO listed its offering at $60/$66 per share on Monday the 15 September, then increased it to $66/$68 per share by Thursday evening. The total offering for Alibaba was breaching the $25 billion market with as many as 48 million shares being made available to underwriters in a 30 day period.

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Yahoo! Executives Celebrate as YHOO Stock Plummets

Prior to Alibaba’s listing on the NYSE, Yahoo! Inc (NASDAQ:YHOO) owned approximately 23% of the company. It sold 121.7 million shares and generated pre-tax cash of $8.3 billion on Friday 19th September. Many investors assumed that Yahoo! Inc (YHOO) would be a safe investment for the Alibaba pop, but that failed to materialize for those investing in Yahoo stocks. In fact, YHOO recorded sharp losses for the day as the stock plunged from over $42 a share to under $40 per share within an hour. There are several potential reasons why this may be the case, including the fact that investors don’t need to go through Yahoo to get involved in Alibaba. Secondly, many investors who wanted money to invest in Alibaba may have pulled it out of other stocks like Yahoo to do just that. For Yahoo, its market capitalization dropped to $40.2 billion, $37.2 billion of which is invested in Alibaba.

Understanding the Offer Price and the Opening Price

Banc De Binary analysts caution that investing in IPOs requires an in-depth understanding of the procedures and processes. Traders following upcoming IPOs should be certain that they understand all the numbers that are being bandied about before committing to stock purchases. For example, the Alibaba (BABA) valuation on Thursday 18th September was $68. This was the price that Alibaba was valued at – not what it would price at on opening day. Stock trading platforms officially opened for orders at 7 am on Friday the 19th September. The price that the market opens at is the price that buyers and sellers will be subject to, after supply/demand has been factored in by the DMM process above. The differential between the $68 offering price and the $92.70 that Alibaba opened at represents excess demand before the stock went public.

Remember that the real winners in most IPOs are not the general public – unless the stock opens and continues growing rapidly. The real winners are the company insiders like Jack Ma and his 5,000 employees who purchased stock in Alibaba while it was a private company. The underwriters make their money by buying up all the stock that gets offered on the NYSE to the general public. Goldman Sachs bought in early and their profit was determined by the opening price of the stock. It should be pointed out that there were no trades in the gap between $68 and $92.70. In other words there was no opportunity to make $24.70 off the $68 stock – the opportunity never existed for everyday investors. Opportunities did exist for the underwriters and the preferred clients of the big banks and the NYSE. The underwriters for the Alibaba IPO collectively earned more than $400 million in fees as reported by the Financial Times.

Written By: Banc De Binary