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Summary

  • Chinese e-commerce companies Alibaba and JD.com have filed for U.S. IPOs.
  • The Alibaba IPO may be impacted by the timing of the JD.com IPO, and may be as soon as April.
  • The first Chinese e-commerce IPO may impact the enthusiasm for and success of the second IPO.

Chinese e-commerce giant Alibaba (ABABA) has been considering an IPO for over a year, but the wait will soon be over. ABABA has filed for a U.S. IPO, and according to Bloomberg, the ABABA IPO may be as soon as next month. The reason for the sudden change in urgency may be because ABABA's little brother Chinese e-commerce company, JD.com, has already filed for a U.S. IPO.

(Reuters) - JD.com, China's second-largest e-commerce company, filed for a U.S. listing of its shares, following market leader Alibaba Group Holding Ltd in tapping into rising investor enthusiasm surrounding China's booming online retail market.

JD.com's estimated value of about $10 billion is nowhere near the estimated $153 billion value for Alibaba, but its growth has been "exponential."

JD.com, which filed a placeholder of up to $1.5 billion on Thursday, has grown exponentially over the past years and said in December it would top its 100 billion yuan ($16.5 billion) annual sales target in 2013.

This exponential growth has generated a lot of optimism about the company, and should help support a solid IPO.

Josef Schuster, founder of IPOX Schuster, a Chicago-based IPO research and investment house, said investors would "flock" to the deal if it is priced at a valuation of $10-$13 billion.

In September 2011, IFR, a Thomson Reuters publication, said JD.com was planning to raise $4-$5 billion through a U.S. IPO.

Much of the excitement is driven by past successes in the Chinese e-commerce space. Chinese e-commerce company TenCent Holdings (OTCPK:TCEHY) has gone "parabolic" since its IPO. Note: TCEHY is the ADR symbol, the graph is for the Chinese listing.

(click to enlarge)

JD.com appears to have a vision similar to Amazon (NASDAQ:AMZN), and it will be interesting to see how AMZN responds to all the new competition. AMZN has been legendary for its ability to shrug off bad news and humiliate the shorts, but this new competition may put a scuff in its teflon.

JD.com has tried to differentiate itself by operating its own network of couriers and warehouses, a factor it says ensures timely and efficient delivery.

Alibaba still depends on merchants and external courier firms for their logistics.

Lastly, the timing of the JD.com IPO may influence the ABABA IPO. If ABABA goes first, it may soak up a lot of the enthusiasm and cash that could have gone into the JD.com IPO, but then again, it may simply get more investors interested. If, however, the first IPO fails, I would expect the second to fail as well. IPOs often rely a lot on emotion, and a cold shower for investors would likely put the chill on IPOs for awhile. If JD.com goes IPO first, and fails, I would expect the ABABA IPO to also disappoint, and shares of Yahoo (NASDAQ:YHOO) that owns 24% of ABABA to disappoint as well. My gut however tells me these IPOs are going to be big, and that is why I started writing about them over a year ago.

The first article I wrote for Seeking Alpha was about Yahoo's holdings of ABABA about a year ago. At the time YHOO was trading at $19.66 and the ABABA was being valued at $38 billion. Today YHOO trades at $37.60 and speculation is that ABABA may be the biggest IOP ever. The current estimate of Alibaba is $153 billion, which would put it in the top 5% of S&P 500 based upon capitalization. To put things in perspective, ABABA would just edge out Citigroup (NYSE:C) for the #23 spot, and only slightly trail Amazon. If ABABA has a very solid IPO, it has an outside chance of making it into the top 10, and I would expect it to end the day ahead of AMZN. According to Bloomberg, if ABABA gets the estimated $153 billion, YHOO's 24% share will equal its entire market capitalization.

In a previous article, I outlined a few investment strategies for the ABABA IPO, one of which involved buying slightly out of the money call options.

Another way to do it would be to buy out-of-the-money calls with expiration dates near, but past the IPO.

Right now, it looks like the ABABA IPO may be coming to the U.S. as early as April 2014. YHOO closed Friday at $37.60, and APR 2014 $40 Calls closed at $0.91. If in fact the ABABA holding represents 100% of YHOO's value, a 6% pop in ABABA post-IPO should send the APR $40 Call options into the money, and a 9% pop would make them profitable trade. The nearly At-The-Money APR $38 Calls trade for $1.61, so if option prices on YHOO are any indication, the markets aren't putting too much of a premium on an ABABA IPO. I would imagine that will change, however, the closer we get to the actual IPO and when a final date and price is released.

The other aspects to consider is that the ABABA IPO will be huge, and soak up a lot of cash, but also index space. Indexes and portfolios that target a certain weighting in the e-commerce space will need to make room for ABABA. That may require them to sell other e-commerce companies like eBay (NASDAQ:EBAY) and Amazon.

In conclusion, the Alibaba IPO is likely to generate multiple trade opportunities. I would expect that the IPO will be bearish for eBAY and AMZN before and after, and expect the Alibaba IPO to be bullish for YHOO before and bearish after.

The bearish view assumes that YHOO sells some of its ABABA for cash. I expect ABABA to outperform cash going forward, so selling shares in ABABA will simply water down YHOO's performance relative to what it would have been if it held the ABABA shares. If YHOO doesn't sell any ABABA shares, I would expect YHOO to closely track ABABA. Because YHOO's market cap will likely match its ABABA holdings, buying YHOO allows one to buy ABABA and get YHOO thrown in for free.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Source: Chinese E-Commerce Giant Alibaba And Its Smaller Brother JD.com File For U.S. IPOs