One of the worst tech companies in 2015 has been Alibaba (BABA). The downfall of this stock, which has lost about of its value from its peak price earlier this year, has been a much-watched event. Hedge funds have famously sold out of the stock. Magazines have written high profile articles about problems with the company and its current valuation—rebuttals from inside the company have been published, and referees have come out of the woodwork (the most measured may be by Business Insider) to weigh both arguments to reach a conclusion. Meanwhile, the stock falls below 65 and looks set to fall further.
The problems with Alibaba are multifold, and the company has suffered a string of bad luck that is ironic, considering many choices, from the company’s ticker to its opening price, were all designed to bring good luck. Unfortunately, BABA IPOd at the beginning of a radical deceleration in Chinese growth and presumably consumer spending growth. At the same time, BABA went public on a New York exchange, so it did not benefit from the absurd Chinese stock bubble that blew up share prices in Shanghai and, to a lesser extent, in Hong Kong. Yet it has fallen further with the burst Chinese stock market bubble, and has been hitting new lows almost daily in the past few weeks.
Then there are the critics. Barrons has criticized everything from the company’s valuation to the honesty and accuracy of its numbers. Some analysts have publicly chimed in. While most professional analysts dismissed Barrons’s analysis as overly simplified, a few have sympathized with it—and even raised new red flags.
To add insult to injury, the lockup is ending at the end of this week. There are 63% of Alibaba’s shares that cannot be bought or sold until next week, as a result of contractual obligations tied to the IPO of the company. One of the biggest stakeholders is Yahoo (YHOO), with 15% of the company. Even if they want to sell, tax considerations may force YHOO to keep the equity ownership. A large portion of the remainder is owned by executives Jack Ma and Joseph Tsai, who have publicly said they will not sell. The fate of the rest of the shares is anyone’s guess, and with the bearish action lately, a guess of a big selloff is probably the more popular option.
What will happen next week to Alibaba? There is, of course, the systemic risk issue. Chinese equities are still extremely volatile and foreign appetite for Chinese paper has become extremely weak. But the lockup question will be a much bigger issue. If larger sales volumes show up, it could cause a vicious cycle of sell-offs as traders try to front-run the insiders looking to sell shares.
On the other hand, we might see few new sellers enter the market. We might even find a recovery in the market and in BABA itself. Such a trend would convince bears that, in fact, insiders aren’t going to start selling like mad during the lockup, causing more investors to take another look at the fundamentals. That could become a virtuous cycle in which buying begets buying, seeing a major recovering in BABA.
The unlikeliest scenario is a lack of movement at all. So much negative attention and so much concern about the future of this Chinese e-commerce giant, and indeed on the future of Chinese commerce as a whole, has caused the stock to receive more attention (this time bad) than it has had since its IPO (that time good). Volatility is almost unavoidable next week. Yet anything is possible in a market, and there’s a slight possibility that volatility, volumes, and pricing doesn’t move much at all. That would cause volatility to collapse and a slower trend for the stock.
But this is an unlikely scenario. Much more likely, it will face intense scrutiny and analysis from traders and investors alike, and end up moving sharply in one direction or the other.