Why Alibaba May See More Volatility Following Lockup Expiration
NEW YORK (TheStreet) -- Alibaba (BABA) - Get Report shares' rocky path could get even worse following tomorrow's expiration of the Chinese e-commerce giant's IPO lock-up.
Wednesday morning will see an additional 337 million more Alibaba shares eligible for sale (about 14% of Alibaba's total outstanding shares), as Alibaba employees and early investors are able to get rid of their shares. Another 100 million shares will become eligible for sale in May, when other institutional shareholders and independent board directors are allowed to sell their shares. Nearly 1.5 billion more shares will become eligible for sale in September when the top executives like Jack Ma as well as Yahoo and SoftBank can sell their shares.
These shares were locked up until now to add protection to Alibaba shares in its early days, but now that they're up for grabs, Alibaba stock could take an additional hit. This comes following the 18.4% decline in Alibaba shares since the start of the year.
With Alibaba shares trading around $84, that's more than 10% lower from the initial public offering price and a nearly 30% drop from its peak of $120, set on Nov. 10.
The steady decline since November can attributed to a number of factors, including concerns over counterfeit products and an illegal practice called brushing where fake buyers are used to increase merchant reviews. Alibaba also disappointed Wall Street, when it missed analysts' estimates in its most recent earnings report, missing revenue expectations by $230 million. On top of that Alibaba is also facing an eviction notice from Taiwan simply for being Chinese -- Alibaba's IPO gave Taiwan the evidence it needed to prove that any operations in Taiwan were a part of the Chinese entity.
The lockup expiration could add some more instability to the shares, according to Wall Street analysts.
In a research note last week, Barclays analyst Alicia Yap lowered her price target for Alibaba to $100 from $107, pointing to the lockup expiration as one factor behind the move. She maintained her overweight rating, however. Today, Morgan Stanley also lowered its price target for Alibaba to $102.30 from $110.80.
There has also been an increased interest in options that bet on Alibaba dropping even lower. According to Reuters, options trades known as puts, (a directional bet that the stock will move lower) betting on the stock moving below $80 by Friday were the most actively traded, and open interest in put options betting on Alibaba shares going below $65 by July 17 has increased to more than 8,500 from less than 1,000 contracts at the beginning of February. Additionally, short interest in Alibaba's shares has risen to 57 million shares as of Feb. 27, up 30% since the beginning of the year, according to Reuters.
Though it's hard to predict exactly what will happen, and lockup expirations don't always lead to declines in share price, it's likely that a lot of these new shares will be sold in the near future.
"I don't think the stock is going to plummet tomorrow because I don't think everyone's going to rush to the exit at the same time," says Erik Gordon, a professor at the University of Michigan, an expert on corporate governance and technology. "But given the recent weakness in the stock, you certainly are going to want to dribble some of it out in the future so you can point to having made money on the stock."
However, not all analysts are swayed by the lockup expiration.
Stifel analyst Scott Devitt today upgraded Alibaba to a buy rating from hold with a $99 price target, citing long-term promise from Alibaba's investment "in platform improvements to increase long-term search result relevance and conversion."
