Yesterday was the first day when pre-IPO investors in Chinese e-commerce giant, Alibaba Group Holding Limited (BABA - Analyst Report) were free to sell their stock and realize gains on their early bets. The 180-day lock-up period, which had prohibited insiders to sell 437 million shares in the market, has now come to an end.

However, out of these 437 million shares, 100 million shares will become eligible for sale when the company announces its results in May.

The Road Ahead

The end of the lockup period may well make things a little shaky for Alibaba. At present, the company has 1.12 billion shares trading. Adding 337 million shares to this number could hit the stock price quite hard.

What makes things worse is that two of its formidable Chinese rivals, JD.com Inc. (JD - Snapshot Report) and Tencent Holdings Ltd. (TCEHY), are both up by more than 19% this year while Alibaba’s share has already seen a 19% decline this year

There are a number of reasons for the recent weakness in Alibaba shares. In January, Alibaba recorded disappointing sales for the quarter ended Dec. 31. The lower-than-expected December quarter revenues highlighted the fact that Alibaba was being negatively impacted by the increased use of smartphones and tablets as its users moved toward mobile shopping.

Alibaba also got into trouble with a Chinese regulator over a report about counterfeit goods available on its platform. The report was later withdrawn. However, Alibaba claims to have ramped up its focus on recognizing and removing fake products from its sites.

In Taiwan, it faces a legal challenge concerning its structure as a Chinese firm operating via foreign holding companies.

What makes things harder for Alibaba is that around 1.58 billion shares will exit their lockup period in September. These shares are held by insiders including Yahoo Inc. (YHOO - Analyst Report).

Basically this means that more than 63% of its shares are yet to be unlocked, which can have a significant negative impact on share prices.

Analysts’ Opinions

IPO stocks have fallen ahead of the end of lockups historically. However, Alibaba shares have only dropped slightly in recent weeks. Shares have fallen about 30% from the post-IPO peak of $120 in November.

In Tony Chu’s opinion (portfolio manager for RS Investments) investors are not expecting Alibaba’s shares to fall drastically at the expiration of the lock up period.

Some of the analysts expect a small drop in the stock price after the expiration of the lockup while others opine that the end of the lockup has already been priced in.

Gil Luria, managing director of equity research for Wedbush Securities, says that given Alibaba's size, any selling will get absorbed without any difficulty.

However, some of the analysts are of the opinion that early investors have a strong incentive to sell their shares. According to Doug Young of Forbes, the pre-IPO investors are likely to sell many of their shares when the lockup period ends “not because Alibaba is a bad company but simply to lock in the huge gains they’ve made from the investment.”

Last Word

While some analysts believe that the lockup expiration will have a negative effect on the stock price, others don’t really agree.

Alan Haft, a Newport, CA-based financial adviser believes that it will take another six months to a year for the stock to cycle back. He also believes that the fundamentals of the company are strong.

Alibaba has been working toward solving the counterfeit issue. The extent to which it succeeds in doing so, its initiatives to grow mobile revenue and its expansion into new markets is some factors that will determine the future of more than one billion shares that will be released in September.

Alibaba is however convinced about its prospects. Alibaba’s executive vice chairman, Mr.Tsai said in January that its quarterly results showed a sturdy foundation for sustained growth. The executives of the firm have also said that they intend to continue with the company for a minimum of 102 years.