Alibaba Going (Relatively) Conservative on IPO

Jacob Harper |

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On Sept. 15, Alibaba announced they would ratchet up their IPO price to just under $70 a share, a considerable uptick from the previously widely reported $66 a share number. The move itself indicates how wildly speculative the tech IPO market has become, and how deeply frightened founder Jack Ma and CEO Jonathan Lu are of following in the footsteps of his American tech counterparts, who seem utterly incapable of correctly pricing their companies.

But it’s not just about money that day. The success of the IPO price will greatly shape the American perception of Ma and Lu. And in the wildly erratic tech sector, perception is everything.

With what is widely expected to be the largest tech IPO in history Alibaba is playing things close to the vest, at least when its concerning their price. After all, a few dollars in the initial pricing one way or another translates into billions that could be left on the table - or billions that could be given over to quick profit-taking investors. It seems the only constant in big-ticket tech IPOs is that they never work how they’re supposed to.

Take Facebook (FB) . An initial offering marred by computer glitches and over-valuation resulted in a momentous face-plant, and it took the company 15 months to recover from.

On the flipside you have Twitter (TWTR) , a company so concerned with doing everything in their power to be the anti-Facebook. If not in Twitter’s aping of Facebook’s design and functionality, then certainly in the way they sold shares to the public, with an initial valuation far lower than analyst estimates. The result? A more than 70% pop on the first day in trading - indicating severe underpricing and thus billions left on the table.

Correctly pricing a large-cap tech IPO is like trying to hit a moving target from a moving train. Ma has to consider both the shifting valuation of his own sprawling e-commerce empire and the erratic movement of the tech sector at large. Alibaba’s debut coincides with a bullish run for tech that goes back almost five years. It also coincides with the recent price check on stateside counterpart Amazon (AMZN) . The American e-commerce giant has seen shares drop nearly 20% in 2014, slowly bringing their valuation more in line with a company whose investment in growth can’t overshadow that fact that they aren’t creating profits for shareholders.

Alibaba is clearly afraid of pulling an Amazon or Facebook and looking overvalued. They’re trying to court investors who will stick it out long term. But the alternative is coming in too low, giving big gains to the market and losing the confidence of your investors.

The Alibaba IPO will likely be the largest in US history, bringing in around $22 billion. Pricing it correctly is almost impossible. But if the conservative bet comes in right, Ma and Lu will certainly look like geniuses. And in tech, just looking right is very valuable indeed.   

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
BABA Alibaba Group Holding Limited American Depositary 90.48 0.62 0.69 11,720,459
FB Facebook Inc. 115.40 0.30 0.26 25,072,300
TWTR Twitter Inc. 17.93 -0.10 -0.55 12,209,289
AMZN Amazon.com Inc. 740.34 -3.31 -0.45 3,562,054

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