Alibaba's Trading! What Have We Learned?
Solid Company, Good Prospects
A Solid Dividend Stock for Unsettled Times
The massive hype-fest leading up to Alibaba's (BABA) IPO last Friday is finally over, the stock is now trading like any other stock and life is returning to normal for investors. For someone like me, who writes Cabot China & Emerging Markets Report, it's good to have BABA settling into a routine, allowing markets to return to their standard condition of controlled chaos. So now it's time for a little after-action review to see if we've learned anything.
As I wrote over the weekend, the Alibaba IPO was a model of good planning and mature decision making. Those handling the process originally priced BABA at 60-62, then raised the offering price to 66-68 when demand proved robust.
The stock began trading to the public around noon on Friday at 92.70 and bounced around a little, unlike other big tech IPOs where speculative pressures led to wild swings. BABA actually spiked to near 100 during its first 10 minutes of trading but settled down quickly, drifting as low as 89.95 before closing at 93.89.
On Monday, its first full day of trading, BABA opened at 92 and then flatlined at 90 for much of the day. And on Tuesday, the stock opened near 88, probably reflecting anticipated profit taking by those who bought at the IPO price or-as is the case with early investors-well below that price.
If you now want to look at Alibaba and its stock as just another investment opportunity, there are some good numbers available.
Alibaba's success at building revenue is apparent from growth numbers from the past four years or so. 2011 revenue growth was 86%, followed by 74% in 2012, 75% in 2013 and 56% in 2014 (the company's fiscal year ends in March).
Earnings were 17 cents per share in 2011, 41 cents in 2012, 90 cents in 2013 and $1.83 in 2014. EPS growth is forecast at $2.35 (28% growth) in fiscal 2015 and $3.14 (34% growth) in 2016.
After-tax profit margins have been above 40% in three of the last seven quarters and over 50% in four.
The trailing P/E ratio is 43 and the forward P/E is 38.
Based on those figures, I'd have to say that Alibaba looks like a reasonable investment for someone with a reasonably long investment horizon.
So, who has made money on BABA, so far? Well, Jack Ma, the English teacher who founded the company in 1999 has done pretty well. He just vaulted to the top of China's net-worth list with a fortune estimated at $25 billion. Much of that is in BABA stock, which would take a long time to liquidate, but he's doing just fine, thanks, as are other founders. Some Alibaba employees also own BABA, and are reportedly quite happy.
Other winners include corporate investors who took positions in Alibaba during its development, including Japan's SoftBank (which invested $20 million in 2000) has a 37% stake worth $75 billion at BABA's first day closing price of 93.89. Yahoo! has a 23% stake worth $26 billion, but the company sold part of its stake as part of the IPO. In an interesting sidelight, the enterprise value that the market ascribes to both SoftBank and Yahoo is essentially the value of their Alibaba stakes.
Also doing well is Silver Lake, an American investment firm that ponied up $500 million in 2011 and 2012 to invest in Alibaba. The company earlier sold part of its holdings for nearly $279 million, but it held onto enough to now own around $5.1 billion in BABA stock.
I heard from several people in the week or so leading up to the BABA IPO who said they were going to jump in despite the risks. I haven't heard from them since the event, but since they were thinking about using limit orders at around 75, I doubt that they are now proud owners.
It's worth remembering that even if you had been given access to BABA shares at the 66-68 offering price, you would have made "only" about 38% when the dust settled. That's a very nice return, of course, but it's nowhere near the monster gains that many hoped for.
So, welcome to the market, Alibaba. When you have been trading long enough to have a chart that shows a usable trend, I'll be happy to put you on my watch list. That will take a few weeks, at least, and 10 weeks at most. (Look for Mike Cintolo's Cabot Wealth Advisory on Thursday for more on IPO chart reading.)
Mostly, though, I just feel like someone who has been living next door to a big wedding party. Pleased for the happy couple, but very glad it's over.
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For today's stock pick, I'm going to recommend a stock I've had in the portfolio of Cabot China & Emerging Markets Report since June 2012! That's a long time for a stock to stay in an aggressive growth portfolio, but there's a reason for it.
The company is Seaspan (SSW), Hong Kong-based owner and operator of container ships, the massive cargo ships that carry big boxes of goods (the capacity of these ships is expressed in TEU, which is Twenty-foot Equivalent Units, or how many 20-foot-long cargo containers it can hold) all over the world.
Seaspan's fleet has been expanding steadily via new shipbuilding. The company now has 109 containerships with a total capacity of 840,000 TEU, including 30 ships that are being built for delivery by the end of 2016. The amazing thing about Seaspan's business is that even the ships that haven't been floated are already committed to long-term leases by shippers.
Seaspan's long-term leasing model gives the company exceptional transparency in its future revenue. The four 10,000 TEU vessels now being built at Chinese shipyards are already under five-year, fixed-rate charter agreements with two consecutive one-year options. This deal will add over $130 million to Seaspan's projected revenue.
SSW isn't exactly a skyrocket, but the portfolio bought it at 17 and it's now trading just under 23. But besides holding (and gradually increasing) its price, SSW pays a handsome 6.2% forward annual dividend yield, which makes it a great core holding for a diversified portfolio.
When markets are jumpy and the future is uncertain, it's good to know that you have a solid, predictable source of gain in your portfolio. Seaspan is just that.
If you'd like more updates on Seaspan 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.
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory