The Alibaba Hangover Report

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The Alibaba Hangover Report
This Weeks Fortune Cookie
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For the past couple of weeks, the main topics on financial websites and cable programs have been the Apple (AAPL) new-product announcement and the upcoming Alibaba (BABA) initial public offering. Now that the long-awaited Apple announcement is history, and BABA has been trading for a grand total of one day, it’s likely that the wave of articles and commentaries about Alibaba’s IPO will start to recede.

I could go against the tide and look for another topic to write about, but the truth is that the Alibaba IPO really is a big deal—especially for me in my role as Chief Analyst of Cabot China & Emerging Markets Report—in every sense of the word, and deserves all the responsible analysis it can get.
I saw a clear trend in the run up to BABA’s Big Day. The company raised its price range for the offering from 60–62 to 66–68. The company also made a point of reiterating the possibility that it might increase the share-count of the IPO if demand proved heavy. And I saw a significant drawdown in the stocks of other Chinese companies that trade in the U.S. as institutional investors increased their cash positions in anticipation.

When the big day dawned and BABA began trading (well after the markets opened, actually), everything went off smoothly, with BABA opening at 92.70, 25 points above the top of its estimated range.

It’s not easy to come up with anything new to say about Alibaba, but here’s my attempt.

First, the Alibaba IPO was very, very well run. Clearly Alibaba’s Jack Ma, the English teacher who has now vaulted into the ranks of the world’s 20 richest people, went to great pains to avoid anything like what happened with Facebook.

You remember Facebook, right?

Facebook (FB) came public in May 2012, and speculation and interest was similar to the current fascination with Alibaba. The company wound up with a market cap of over $104 billion after the initial sale, the largest tech IPO in history. Estimates of FB’s price increased rapidly in the days before the sale, with the stock finally offered at 38.

FB soared as high as 45 on its first day, then ran downhill at high speed until it closed at 18 on August 31, 2012. Commentators were joyous to have such a debacle to write about, and they jumped on FB with both feet.

Jack Ma apparently took Facebook’s experience to heart, and he was determined to avoid such an embarrassment. Rather than over-reaching, BABA priced at a relatively reasonable level.
(I could make a snarky comment about the difference between Jack Ma’s personality—serious, mature, pragmatic—and the personality of Facebook’s founder, Mark Zuckerberg. But I won’t.)

Second, if a large number of individual U.S. investors wind up buying shares of BABA, it will probably be the first Chinese stock they’ve ever owned, maybe even the first non-U.S. stock.

Investors in all nations tend to stick with what they know, and that means stocks of companies in their own countries. Maybe they’ve owned a few big multinationals, but that’s about it.

The opportunity in China has been enormous over the past decade or so, but the uncertainties have been too great for many investors to come to terms with. My Cabot China & Emerging Markets Report has booked some huge numbers when conditions were right. But Chinese ADRs (American Depositary Receipts—stocks of foreign companies that trade on U.S. exchanges in U.S. dollars) just aren’t on most people’s radar screens, which seems like a big mistake to me.

I think the Alibaba IPO might change that. Having one rock-solid company that makes a big splash could open many U.S. investors to possibilities around the world. People could look at Baidu (BIDU) or Seaspan (SSW) or some other thriving Chinese companies and find real opportunities.

If Alibaba winds up being that kind of eye-opener, it could be significant beyond just its IPO price.

Third, it’s important for investors to remember that Alibaba is just a platform for getting buyers and sellers together. The company doesn’t sell a darned thing on its own. It has no inventory and it doesn’t do its own shipping. It provides a marketplace, just as eBay or Craig’s List do.

Such a business model keeps overhead down and the price of expansion under control. The company will never have a warehouse destroyed by fire or problems with logistics. It’s a relatively low-risk business proposition.

Lastly, when you think about Alibaba, don’t just think about what the company is now. Consider this combination: a huge, successful company, the largest market in the world, a disciplined, ambitious CEO, and a bankroll for development, acquisitions and other deal-making that’s larger than the cash pile Apple is sitting on.

Makes you think, doesn’t it? This will be fun to watch.
For more updates on Alibaba as well as additional fast-growing Chinese stocks, consider taking a risk-free trial subscription to Cabot China & Emerging Markets Report. It’s been a great year for Chinese stocks and we see even higher upside potential, especially in the stocks we hold in our portfolio. 

Get more details here.

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

Tim’s Comment: Simple but profound. Most investors have opinions about what the market will do, and all investors have opinions about what their stocks are likely to do (go up, of course). But sometimes these investors are wrong, and only by ensuring that their winners outweigh their losers are they able to succeed. To improve their performance, the best investors recognize that the market is always right, and anytime they want guidance, they consult the market.

Paul’s Comment: This wise saying is so central to Cabot’s growth disciplines that it’s carved on the mantel of one of the two (no longer used) fireplaces in the Cabot offices. Think I’m kidding? Here’s a picture! (The two bulls in the trophy cups are reversible into bears when markets turn south.) For a real growth investor to doubt the market is like a fish in the ocean denying the tide. It just doesn’t make any sense. 

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In this week’s Stock Market Video, Mike Cintolo, Analyst of Cabot Market Letter and Cabot Top Ten Trader, discusses the split action he’s seeing in the market. Mike is optimistic that the early-September weakness could be the third and final shakeout in growth stocks (he reviews a handful of his favorites that look ready to get going), but he’s aware that there’s also a bunch of “late-stage” evidence in the market—things that usually occur in the seventh or eighth inning of an advance. All told, Mike’s playing things about halfway, and is ready to move quickly in either direction as soon as the market shows its hand. Click below to watch the video.

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 9/15/14—The Tractor Story

In this issue, Tim Lutts, Chief Analyst for Cabot Stock of the Month, does a rerun of a story about the Ford 8N tractor that he grew up with on Cabot Farm. Tim asked subscribers whether he should overhaul it or buy a new one, and then ran the answers. Stock discussed: Arris Group (ARRS).

Cabot Wealth Advisory 9/17/14—Is Alibaba Undervalued?

Roy Ward, Chief Analyst of Cabot Benjamin Graham Value Investor, applies his value expertise to the question of how much Alibaba’s stock is really worth. Roy finds a price at which Alibaba is a reasonable bargain. Stock discussed: Alibaba (BABA).

Cabot Wealth Advisory 9/18/14—The Alibaba (BABA) IPO

Chief Analyst Jacob Mintz, the brains behind Cabot Options Trader, gives his take on the Alibaba IPO, including whether it’s possible to use options on Yahoo (YHOO) (which owns 22% of Alibaba) as a lower risk way of participating in the big event.

Have a great weekend,

Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
And Cabot Wealth Advisory


The Alibaba (BABA) IPO

Is Alibaba Undervalued?


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