Alibaba’s (BABA) IPO was decent, respectful, but nothing spectacular. Recent strong IPOs like GoPro (GPRO) and Twitter (TWTR) are counterpoints; both started strong and quickly rose in the first few weeks of trading. BABA’s story is different.
A decent pop meant post-IPO investors got shares at about 45% of the IPO price, but those retail investors were surely frustrated if not outraged to see the share price fall steeply afterwards; just a few weeks ago, the stock was down 16% from its first day of trading. While still well above the IPO price, that was a price very few non-participants could get, as institutional allocations were large on strong demand.
Rumblings of a repeat of Facebook’s (FB) calamitous IPO reverberated amongst a lot of retail investors and popular media, but these were short-sighted to say the least; FB has doubled since its original IPO price, beating the S&P 500 or any technology index you can think of. It is even strongly beating the Social Media ETF (SOCL) that many would see as lower risk due to its diversification. But even on a drawdown comparison, FB wins.
Meanwhile, the performance of strong IPO stocks is not good. GPRO tripled from its first day of trading in a quarter, then sunk about 30% in less than a month. Despite extremely strong beats on the top line and bottom line, TWTR lost 12% of its value after its most recent earnings call, and is in negative territory post-IPO. Looking at the charts, these stocks are following the typical pattern that one favorite financial chart depicts:
Click on image to zoom
Part of the problem is valuation, and part of the problem is that their value has been assessed by non-financial and financial metrics. Another part of the problem is that a lot of money flowed into these “game-changing” stocks without a price target or an exit strategy. This is often how retail investors think; it is never how institutional investors think.
In any case, BABA’s chart is beginning to change, and this is significant, because it could begin to take the form of the chart above, or we could begin to see a different pattern: the S-curve.
Click on image to zoom
In this chart the stock begins in a low, relatively unstable position as the market mulls its value. BABA has been in this position since its IPO; concerns about ownership structure, about systemic risk, about China’s slowdown, and about Jack Ma himself have kept market participants debating its value. Now we are beginning the “replicating and improving” pattern of stock price appreciation, which may accelerate into the bubble pattern above or fall into the desired S-curve in which it rises with some stability as the market fully realizes its true value.
It is too early to tell which pattern the stock will take, and how market participants will react when they anticipate one curve or another curve. For bulls and bears on BABA, how can they act now?
The key with this stock is the same as with every other stock. Is it cash flow positive? Is its business model sustainable? What price are you paying for earnings, and how does it compare to the price you would pay for competitors’ earnings? Does it have a moat and, if so, what is that risk to that moat? How much growth is already priced into the stock, and are there unforeseen sources of growth acceleration or deceleration?
In other words, to analyze whether you’re buying into a bubble or into a growing stock, you need to do the same think that you would do with any other stock: establish its value, establish its growth potential, and price it accordingly.