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Saturday, September 20, 2014, 17:57

Experts urge rational judgment of investment in Alibaba

By Xinhua
 Experts urge rational judgment of investment in Alibaba

Specialist trader Neil Gallagher points to the ticker symbol for Alibaba Group Holding Ltd during the company's initial public offering (IPO) under the ticker "BABA" at the New York Stock Exchange in New York Sept 19, 2014. (Photo/Agencies)

WASHINGTON - As China's e-commerce giant Alibaba Group surged high on their first trading day at the New York Stock Exchange (NYSE) Friday, US experts appealed to investors to look at the high-flying company in a rational way.

The stocks of Alibaba jumped 38 percent from the IPO price of 68 dollars to 93.89 dollars per share Friday, valuing the company at over 230 billion dollars, compared with a market capital of 150 billion dollars owned by its American rival Amazon.

"To the Western world, Alibaba represents a company that has created value in novel and innovative ways and also has been to sustain that value growth over a span of 10 years. So they are betting on Alibaba's ability to keep doing this," said Puneet Manchanda, professor of marketing at Ross School of Business, University of Michigan.

Investors have seen how other e-commerce companies like Amazon and eBay have grown rapidly and they do not expect Chinese consumers to behave differently from Americans and people in other countries, said Linda Lim, professor of strategy at Ross School of Business.

Besides, Alibaba's well-established reputation and its leadership in the e-commerce area in China, the world's fasting-growing economy, attracted investors naturally, Lim said.

Yet in spite of Alibaba's good start at NYSE and its obvious charm, experts were also cautious about its future growth.

"It is always hard to predict the future," said Amiyatosh Purnaanandam, professor of finance at Ross School of Business.

"But historically, a number of firms show very high growth rate just before their IPOs. More often than not these growth rates do not materialize in the long run, and the shareholders get disappointed with long-term returns," he said.

The current valuation of Alibaba is based on an expectation of 30-35 percent growth rate year-on-year, which will be an extremely hard task to achieve, he said.

Alibaba has good business foundations, but they are issuing IPO at a time when stock markets as a whole are at their historic peaks, which means that Alibaba's valuation is based on valuation of other companies at their peak, the professor said.

One reason that these firms have high valuation is the near-zero interest rate policy of the Fed, he mentioned.

If the interest rates increase in future, he expects a decline in stock market in general and Alibaba might suffer more from such a decline.

Lim holds a similar view with Purnaanandam.

The reason for high stock market valuations these days is because "money is cheap" due to central bank monetary stimulus around the world, Lim said.

It is hard to make a good return with stock values probably at their peak and bond prices likely to fall in anticipation of higher interest rates, she added.

Erik Gordon, professor of marketing at Ross School of Business, said: "I think the stock price will rise initially, stay high for a period of time, and then start to fall when investors have a clearer view of the company's future growth and profitability."

"Many Chinese tech companies fall out of favor in the U.S. and European capital markets because the expectations regarding transparent disclosure and regarding corporate governance are different than what Chinese companies actually do."

"It is a cultural difference and a legal difference," he stressed.

If Alibaba wants to improve its competitiveness, Puneet Manchanda, professor of marketing at Ross School of Business, gave a three-point proposal.

Firstly, Alibaba needs to leverage mobile to accelerate growth in China via m-commerce.

Secondly, they need to forward integration and exploit adjacencies to their business to get fast growth. One such example is logistics and supply chain.

And thirdly, they need to target different geographies, for instance, outside China, which will be the most difficult for them as their amazing success is largely based on their deep understanding of Chinese consumers, the Chinese political system and the overall environment. It is not clear that this advantage will carry over to newer geographies.

But Professor Manchanda believes that Alibaba has delivered consistently for a long time and they have a good portfolio of three stable businesses - Alibaba, Tmall and Taobao. These will continue to generate good, if not spectacular, returns.

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