Alibaba Sept14The last days of a bubble are always the most fun.  And Alibaba’s New York market debut last Friday will be one of those to treasure and report to the grandchildren in decades to come.  There were so many elements to enjoy:

  • The investment bankers got the price wrong by 40%, but will still walk away with $250m in fees
  • They priced it at $68/share, but it actually peaked at $99.70 before closing at $93.89
  • There really aren’t that many jobs where you can make a colossal error like this with no downside

And if we look at the company itself, its metrics are even more fun:

  • Its Price/Earnings ratio was 40 at the $68 opening price
  • On Ben Graham’s formula, this equates to earnings growth of 16%/year for the next 10 years
  • At Friday night’s close, the ratio was 55, implying annual earnings growth of 23% until 2025

Of course, Alibaba’s debut reminds us of the dot-com bubble back in 2000.  That was even more fun:

  • Microsoft’s P/E ratio peaked then at 135, more than double Alibaba’s
  • It would have had to grow earnings 63%/year till 2010 to justify this
  • Earnings have actually grown 14% since 2000: thus its share price is still below the $58.72 level reached then

Microsoft, of cvourse, is a real company like Alibaba, with genuine products and earnings.  But tis share price history is a good reminder that bubbles can grow very much larger than one could possibly ever imagine.

All the speculators need is for vast supplies of free cash to be made available by the central banks, as the Amazon story reminds us

  • Amazon’s market capitalisation today is similar to Alibaba’s
  • And it earns virtually no profit at all
  • Thus its current P/E ratio is around 500, meaning investors hope earnings will grow 250%/year

But the ever-cautious blog remembers that margin debt on the New York Stock Exchange is already higher than in 2000, so this story may not have much longer to run.

And a further sign of trouble ahead is that even a US Federal Reserve Governor, Richard Fisher, is suggesting that markets might be nearing the end of their run.  Speaking of Jack Ma’s success with the Alibaba IPO, he noted:

He is of course selling into a market that is very rich. We’ve helped make it so at the Federal Reserve…we have been extremely helpful. After that March ’09 bottom, we have come up over 2 1/2 times. So good timing, I would say. Smart guy”.

When we sit down with the grandchildren to tell the Alibaba IPO story, the moral will be clear.   One of the largest speculative frenzies in history was actually funded by the US central bank and its partners around the world.