Alibaba: From FOMO to FOGI

Δημοσιεύθηκε: 21 Σεπτεμβρίου 2014 - 16:08

Fear of missing out, or FOMO, can make people do irrational things. And so it proved on Friday when shares in Chinese internet giant Alibaba closed their first day of trading at $94. The offering price was $68. The opening day pop was huge, even by Wall Street's exuberant standards.

This means someone has got something badly wrong. If the closing price represents Alibaba's underlying value, the company's balance sheet is now $8bn lighter than it would be had the offering been priced correctly. Despite strong demand, the company and its underwriters lifted the offer price only $2 from the initial range of $60 to $66. This modest approach provided an auspicious price - in Chinese, the number six is a homonym for "flow" and eight for "fortune". But $8bn is too large a gift to fortune (and to the fortunate ones who were allotted shares at $68).

Alternatively, it might be the buyers that have it wrong, if they are concerned about value at all. This seems more likely. Alibaba's market capitalisation is more than $230bn, larger than eBay and Amazon combined. The stock trades at more than 40 times this year's earnings, according to the handful of analysts' forecasts listed on Bloomberg. This makes it wildly more expensive than eBay (16 times) and Hong Kong listed gaming and messaging service provider Tencent (29). Relative to 57 per cent forecast growth in earnings, this may not seem steep. But these strong growth forecasts for Alibaba assume that net income margins rise from 45 per cent this year to more than 50 per cent for 2015 and 2016.

Alibaba's margins, and now its valuation, will invite vicious competition. And that will not be the only source of margin pressure. Regulation, infrastructure building, and international expansion will all take their toll.

Some of this is within the company's control, some not. FOMO can only push the market so far. At some point FOGI (fear of getting involved) kicks in. That point may not be far from $94.

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