Alibaba 24/7

by Paul Goodwin on September 11, 2014

This is an excerpt from Cabot China & Emerging Markets Report, which seeks to capitalize on the big boom in China and other emerging market countries. Editor Paul Goodwin, Cabot’s international investing guru, provides your passport to profits.


We 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, in every sense of the word, and deserves all the responsible analysis it can get.

While some of the stories will have useful information about the company, its business model, its current success and its prospects for future growth, there will also be a lot of blather. Commentators will find some scenario that involves the company either melting down or taking over the world. There’s a need to produce gaudy headlines, so these people will say what they have to do get them.

We have seen one nicely reasoned article asserting that the company’s net worth is such that the IPO should price at 100, rather that the 60–62 range that’s been publicized.

If that’s going to happen, it will only come about if the Alibaba team that’s now running the road show—a series of presentations to potential institutional investors—believes that there’s an overwhelming amount of institutional interest.

One possible influence on Alibaba’s IPO strategy is what happened when Facebook (FB) came public in May 2012. Speculation and interest in Facebook was similar to the current fascination with Alibaba, and 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 being 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.

Founder Jack Ma, the Jeff Bezos of Alibaba, has apparently taken Facebook’s experience to heart, and he is determined to avoid such an embarrassment. BABA will likely price at a relatively reasonable level.

We have received a number of requests about how to “play” the BABA IPO. We understand. Sometimes it’s just fun to take part in a big news story. And sometimes, just by chance, you can even make money at it. But remember that you are buying BABA on a whim, not based on any rational data about the company’s performance, business plan or potential. Until BABA has been trading long enough to get a 25-day moving average, you’re essentially flying blind.

Anyway, here are a few rules that will at least control the potential damage.

The big rule is to keep the size of your initial buy (dollar-wise) at a level appropriate to such an investment. You’re essentially paying to go to a party, so don’t bet the ranch.

Second, if you wind up with a 10% or 20% gain in the opening days, you should consider banking half of that profit, or at least putting a stop at breakeven.

Third, remember that there is a big population of early investors out there who have already announced that they will be looking to get their own profits out in the first few days or weeks. That’s likely to put pressure on BABA’s price. So use a reasonable (15% comes to mind) stop loss to keep your potential losses under control.

It will be interesting to all holders of Chinese stocks to see how the BABA IPO will affect the whole pool of Chinese ADRs. We will be watching closely along with the rest of the investment community.

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