Is the Alibaba IPO Overpriced?

The Alibaba IPO has fallen into the same trap as Facebook (Nasdaq: FB) and Twitter (Nasdaq: TWTR).
The Chinese e-commerce giant began public trading today under the ticker symbol BABA. The company priced its IPO after market close yesterday at $68, the high end of its upwardly revised expected range. The $21.8 billion Alibaba raised makes it the largest IPO in U.S. history, shattering the previous record held by Visa’s (NYSE: V) $17.9 billion 2008 IPO.
The record money raised gave Alibaba an opening valuation of $168 billion before a single trade on the stock could be made. That’s higher than Amazon (Nasdaq: AMZN), Disney (NYSE: DIS) or Visa.
Turns out, that was just the tip of the iceberg. When the Alibaba IPO began trading on the New York Stock Exchange shortly after noon today, it opened at a whopping $92.70 per share. That means company executives and insiders who got in on the stock before it went to market were already up more than 36% when shares were opened to the public.
At $92.70 a share, Alibaba debuted with a market cap north of $225 billion. That’s more than 44 times earnings – a high valuation, but not crazy, especially for a tech company.
But we’re already seeing the sticker shock from such an elevated share price.
In the hour since Alibaba opened for trading, shares have tumbled 2.5%. In other words, if you were waiting for the stock to hit the market and bought shares the second it was posted, you’re already down. Hopefully you didn’t do so.
We at Wyatt Investment Research rarely recommend IPO investing. That’s especially the case with a company like Alibaba.
Like Facebook in 2012, almost unprecedented hype has fueled Alibaba’s IPO price to irrational heights. Unlike Facebook’s disastrous debut, Alibaba’s IPO went off without a hitch on the NYSE. A technical glitch with the Nasdaq infamously hamstrung Facebook on its first day of trading. Also, Alibaba’s initial P/E of 44 is less than half Facebook’s initial valuation of 100 times earnings in its IPO.
Alibaba is a fast-growing company based in the world’s most populous nation. Over the long term, it looks like an attractive buy-and-hold investment. Like most big-name tech IPOs of recent vintage, however, Alibaba shares look a bit frothy on their first day of trading.
My advice? Like a fine wine, let it breathe.
There are so many unknowns surrounding any IPO. Just ask Facebook. Today, the social network looks like an excellent stock, having virtually doubled in the two and a half years since going public. But the stock tanked in its first six months, and took a full year to even get back to its IPO price. It was simply too overvalued – and overhyped – in the early going.
Perhaps Alibaba will avoid the same pitfall. But why take the chance? Alibaba should still be a good long-term investment three or four months from now. At least by then you’ll have a better idea of what to expect from the stock.

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