Alibaba IPO Is a Freight Train

 | May 07, 2014 | 8:16 AM EDT  | Comments
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The last thing this market needs is an initial public offering from Alibaba. I can't even begin to tell you how many things can go wrong, how many bells can go off and how much havoc there could be with this deal.

It may be the single most fraught part of this stock landscape.

And it can't be prevented. It's going to happen. And the odds of it happening in any orderly, positive way seem so long right now that you have to wonder if the Alibaba IPO wasn't put on Earth to ensure this now-broken bull market in technology and e-commerce not only dies but stays dead.

First let's deal with the symbolism. Right now, the size of this deal could rival the $19.6 billion Visa (V) deal or the $16 billion Facebook (FB) IPO. Visa? The first thing you should ask yourself when you hear talk of that size is, "Where is the money going to come from?" The answer: from Facebook, from Amazon (AMZN), from eBay (EBAY), from Google (GOOG) and from the rest of the most struggling cohort in this marketplace.

Now, let's say the deal exceeds Visa and Facebook in size. Can you imagine how many times you will have to hear, "A Chinese internet IPO that's the biggest deal ever -- doesn't that have to mark a top?" It's such an easy question, and it will be asked so many times that I think it could actually become self-fulfilling. I could see myself saying it a half-dozen times today alone.

It gets worse. Sure, "Alibaba is synonymous with e-commerce in China," as it says in the offering document. Absolutely, this company is "China's largest online shopping destination" with China's "most popular mobile commerce app." Yes, it had $248 billion in total gross market value revenue, more than that of Amazon and eBay combined. It received 11.3 billion annual orders from 231 million buyers, including 136 million mobile monthly average users in the still-very-undeveloped retail market in China. It does have a fabulous ecosystem, with 620,000 marketing affiliates and 980,000 direct and indirect cloud customers.

There's also the 57% revenue growth at Alibaba -- faster than that of Facebook -- and that growth seems to be accelerating as more and more Chinese get on the Internet and go mobile. The company has a one-day business that crushes our Christmas gift-giving. Yes, Singles' Day, on Nov. 11, generated $5.8 billion in sales, or 5 billion packages from 254 million people. Amazon would kill for that kind of holiday traffic.

Most noteworthy of all, Alibaba is extremely profitable and has a gigantic gross margin of 47%. The company made $3.1 billion in profit for the first nine months by taking a huge cut on each order, a great deal of it coming from a search engine that's the envy of Google.

But if you read through that offering document, the only thing you should be thinking about is that holders of Amazon, Google, eBay and Facebook will be tempted to sell their stock in order to pick up Alibaba. It is one gigantic magnet that will suck out capital from all over the place, as there just isn't enough freed-up money in the entire marketplace for this one.

These stocks -- whose metrics are pretty much all inferior to those of Alibaba -- are all for sale, anyway, before this deal has even arrived. It's become common parlance that all of these stocks are bubbles, anyway, that are all one step away from the short-selling posse. Alibaba should tip them all into vicious sell mode as the money pours from them to this deal.

Then there are the complications coming from the ownership structure. Yahoo! (YHOO) owns 40% of the company, and it has stated that it wants to be a seller of its stock so it can expand its own business and buy back its own stock with the proceeds. Sorry, but if Yahoo wants to sell, why the heck should I be a buyer of Facebook? Why not just go be a buyer of Yahoo? If the Alibaba IPO comes well north of $20 billion, something that's always possible, the rest of Yahoo will come to cheap. However, you can then hear the catcalls already. Will it be cheap? Or is Yahoo undermanaged and worthless? Is it a value trap? Yes, I can hear the catcalls already. More supply from all over the place.

Now, let's deal with the real elephant in the room. This company is predicated on Chinese Web growth and Web sales. Who has faith in China? The country itself seems to be decelerating by the day. Was Singles' Day a one-off, a silly holiday that will go away? Does the Communist Party like this company and the wealth it creates? Do they want that level of consumption? Could they shut it down? Could they create a competitor? Why not? This government, and its oversight of the financial aspects of companies there, has a horrendous track record when it comes to policing capitalism. So many Chinese deals have been busts. Plus, even when they blow out numbers, as Baidu (BIDU) has done, it's a total bust. Why bother with this one other than because of the hype?

Yes, this lucrative high-growth company has all of the earmarks of disaster for the rest of the market. If the Alibaba deal comes at a lower price, it will be regarded as a failure. If it comes at a higher price, it will be overvalued. There is no just right pricing. Then there's the confusion of the whole ownership structure, and the inability of any exchange to allow us to feel confident about the handling of a deal like this. In light of this, every day leading up to the deal will be another day of potential ruination as the selling proceeds apace to get the funds to participate and weight themselves into this deal -- one that's too big for institutions to ignore.

In short, I am dreading this deal like a Chinese plague. You should, too.

There is only one thing that can save this deal: if everyone reviles it as much as I do. That way, you can get something done that won't wreck the rest of the tape. But, given the precarious nature of the segments in which Alibaba plays, and given the recklessness of the bankers that control these things, I figure there have to be multiple debacles ahead.

I am not a fan of "Sell in May and go away." If it didn't rhyme, I don't know if people would even say it. But I could be a fan of "Sell in front of Alibaba and go away."

Yes, that's how concerned I am about this deal and its consequences for the entire stock market. The giant sucking sound of money flowing out of everything else to flock to this deal will drown out anything good that might happen.

Wrong time. Wrong business. Wrong cohort. That's the Alibaba deal in a nutshell: the classic top signal for all to see. Let's hope this oncoming train doesn't jump the rails and plow into the rest of the market. I just don't know how that accident won't happen.

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