Alibaba (NYSE: BABA) first opened for trading to substantial fanfare from investors and Wall Street. The initial offering was expanded by 15% to meet strong investor demand, with the IPO underwriters exercising a Green Shoe Option for an additional 48 million shares. The initial public offering saw shares selling for $68 apiece before rising a stunning 38% in the first day of trading to close at $93.89 per share. This marked the largest IPO in history, exceeding the 2010 IPO of Agricultural Bank of China’s $22.1 share sale. 

Like many other companies in the e-commerce industry, Alibaba’s status made it a special favorite amongst investors looking for insights into consumers and the Chinese economy. The rapidly expanding pace of ecommerce and strong foothold saw institutional investors account for a large portion of the offering.  With ecommerce in China expected to top $400 billion in 2015 and Alibaba acting as the biggest operator in the space, the company was poised to take advantage of its prestige. Putting aside the optimism, several factors that have recently arisen pose serious problems for Alibaba shares.

Pervasive Fraud Dogs the Company

Much hype surrounded the offering and investors were clamoring for more as evidenced by the expanded offering. However, lingering under the surface were a variety of problems for the company as allegations of widespread fraud and abuse spread in January. Much of the foundation for the valuation was based on the number of customers. Recent revelations show that many customers are actually fake, paid by vendors to buy empty boxes for a small remittance so that vendors can achieve higher ratings and better positioning on the Alibaba website. The technique, known as “brushing,” has received wide condemnation, made worse by the fact that some vendors offer these illegal services on for sale on the platform. 

Other problems stem from the extensive distribution of counterfeited designer goods. Although Alibaba has been expelling vendors and merchants that fail to comply with rules, the pace of expansion make policing the platform an arduous task. With much of the valuation built on the idea of customers and sales growth, this calls the numbers into question as the actual amount of brushing and fake customers can only be estimated. When investigated, Alibaba employed one of Wall Street’s time tested techniques of lobbying for the language to be toned down, trying to avoid the word “piracy” at any cost. There is a wide range of estimates as to the number of counterfeited goods and sales that comprise the company’s revenues, but no actual figures have been revealed. These business practices call into the question the foundation of the company’s meteoric valuation.

End of Lockup to See More Selling Pressure

With any public issuance of stock, there are certain investors that hold large stakes and those that buy pre-IPO that are prohibited from selling during the lockup period. The period, which can range from 90-180 days, can stoke selling pressure when the period ends as early investors seek to lock in profits and reduce exposure to companies in order to diversify funds. The end of the Alibaba lockup period on March 18th saw 437 million shares freed up for sale. While the impact was limited, the company is trading well off the highest price of $120 per share reached in November. With Alibaba stock still trading above the pre-IPO price of $68 per share, there is a strong possibility that investors will want to take profits and cash out considering the persistent headwinds the company is facing.

The Technical Take

Alibaba, which trades under the ticker BABA on the New York Stock Exchange has a very limited amount of trading data owing to the recent IPO.  Technical analysis typically works better on a longer time frame, however, a quick look at the chart is uninspiring. With the company trading below the IPO price and the slope of the 50-day moving average pointing to continued weakness, upside momentum will be difficult to find in the short-term.  With the exception of a few prints, BABA stock has largely been trading in a downward-trending equidistant channel since peaking in November. On that basis, initiating short positions at the upper channel line to be closed at the lower channel line will be idea ahead of the next earnings announcement on May 15th. With risks acutely to the downside in the short-term on a fundamental and technical basis, investors looking for long-term value should wait for better entry points.

Conclusion

On a long-term, fundamental basis, the company is well positioned to be a stronger leader in the ecommerce trading space. Under the stewardship of Founder Jack Ma, the company is poised to continue to ambitiously pursue growth. His humility and drive make him an exceptional person to herald an era of continued growth as the value of ecommerce transactions grows over time. The company itself has strong future prospects based on the ability to transpose the platform and model to other markets. Already the company is experimenting with expansion into South Korea which could become a template launching the platform in other global marketplaces. However, until the company can deal with lingering fraud related issues, growth will always be suspect as measuring the true value of the company will prove near impossible. However binary options traders can turn profits by following the down-trend and making short-term trades taking "Put" options when the stock moves to the upside.