Alibaba, the Chinese business to business e-commerce giant, is expected to file for an IPO in the next quarter; this highly expected IPO, that is valued at around US$190-200bn has already a huge impact in public markets, precisely in two tech corporations: Softbank and Yahoo!. Even if the financial situation of these companies is really different, as it is the capitalization (respectively $US92bn and $US37bn), what these two stocks have in common is a massive stake in Alibaba: 24% for Yahoo! and 37% for Softbank.
Yahoo! Is facing a difficult turnaround, with Marissa Mayer as CEO, after some successful products and encouraging data the company seems to have a stagnant outlook and, despite the 17 acquisitions in 2013, not to have disruptive innovations or star products coming in the next year. The stock is up 95.29% YoY and two months ago reached for the first time the price per share offered by Microsoft in 2008 (and refused). In October, despite poor earnings, the stock was flat/up because of the growing Alibaba’s revenues and the announcement that Yahoo! would not sell entirely its stake during the IPO.
Softbank is showing good performances as well and is up 179.62% YoY, that seems to be mostly due to the iPhone growth in Asia, some good acquisitions (Supercell) and the Japanese monetary policy.
We tried to compare the most important Alibaba’s news with the behavior of the two stocks in the last three months:
The period delimited with the yellow lines Is the earnings’ period, in which the correlation is less clear because of the massive series of acquisition made by Softbank and the different reaction to the earnings’ announcements; anyway, we were able to find at least three major rallies attributable to Alibaba’s IPO: the first rally observed was subsequent to the voices about the location of the IPO, that was originally thought to be held Hong Kong but after planned in US due to regulatory issues. This rally was stopped and dumped by the announcement of Alibaba’s CEO, that, although confirmed the abandon of the Hong Kong’s way, stated that nothing would have been decided until the first quarter of 2014. The last observed rally was during and after the single’s day, a Chinese holiday in which Alibaba, as expected, broke sales records.
The interesting outlook in this story is that, as we noticed, a great part of the interest in Softbank and Yahoo!’s (mostly) stocks is due to the high interest in Alibaba’s future, and indeed Yahoo!’s Q4 earnings call in late January probably will be the first source of information about Alibaba’s revenues prior to the IPO filings. Furthermore, the weird corporate governance that characterizes Alibaba, which puts the control of the firm in the hands of 28 founders and stockholders who hold just over 10% of the shares is likely to be very dangerous to the two major shareholders while moving to an IPO. For example, in early 2011, the company transferred its electronic payment business, Alipay, to a company controlled by Alibaba’s founder Jack Ma. Yahoo’s CEO, Jerry Yang, said he was not consulted about the sale as it wasn’t Softbank; When news of the Alipay sale was announced, Yahoo’s stock fell by more than 7%.
Investors are not betting on Yahoo!’s recovery and Softbank’s market share, but buying one of the biggest IPO of the 10’s. Even if both are planning to take or cut slightly their stake after the IPO, benefiting consequently in terms of cash flows and positive correlation, we believe that both will suffer of a lack of interest after the IPO, that would significantly reduce the YoY returns and the high multiples of the stocks.