I recently wrote an article about the upcoming Alibaba (ABABA) IPO. In the article I argued that the shear size of ABABA was likely to negatively impact Amazon (NASDAQ:AMZN) simply because of index and portfolio rebalancing. I argued that ABABA would be added to indexes and portfolios that target the e-commerce and related sectors.
Because AMZN and Alibaba are very similar in capitalizations, $168B vs $153B, Alibaba threatens to represent an equal weight in portfolios required to have exposure to the Internet Retail Sub Industry and General Retail Industry.
To make matters worse, Alibaba doesn't only have real earnings, they have real earnings growth. AMZN simply doesn't measure up to the size of Alibaba's earnings and earnings growth rate. Alibaba's earnings chart looks like it took an overdose of Viagra, while AMZN looks to be suffering from a severe case of ED.
The key point was that:
1) I would expect portfolio managers to rebalance their Internet Retail and General Retail holdings to accommodate Alibaba. Alibaba is technically more a wholesaler than retailer, but I doubt that will matter. If this happens, portfolio managers will likely sell AMZN and eBay to buy Alibaba.
Just Friday night on CNBC AMZN was covered, and sure enough, it looks like the market is adjusting just as predicted. AMZN has been dramatically underperforming not only the S&P 500 but also the consumer discretionary, retail and internet retail sectors.
While I'm not a big fan of technical analysis as a stand alone form of analysis, I do like to use it in conjunction with fundamental and other forms of analysis. In my previous articles I made the fundamental argument, and the CNBC video makes a very strong technical case against AMZN. AMZN is clearly showing weakness, and the technical topping pattern is the last thing I would want to see in advance of the ABABA IPO. The ABABA IPO is almost certain to suck the air out of all the sectors that AMZN is found, and will likely be the catalyst to drive AMZN down even further. Weak fundamentals and weak technicals are a real problem for AMZN going into the ring against the ABABA IPO. From the looks of things, the market has already placed odds on ABABA emerging the winner.
eBay (NASDAQ:EBAY) has also shown recent weakness, and is another stock that will likely be hurt by the ABABA IPO. Yahoo (NASDAQ:YHOO) is off 10% over the last month, which may imply that the IPO market is cooling off and/or the speculation as to ABABA's valuation may have gotten ahead of itself...way ahead of itself. Even if the valuations of ABABA are overblown and the IPO fails to match the lofty expectations, I would still expect it to be large enough to harm AMZN and EBAY, but I would then expect YHOO and to a lesser extent Softbank (OTCPK:SFTBY) to join the crowd of those stocks hurt by the ABABA IPO.
Anyway, back to ABABA. Because of the "frothy" environment of the upcoming IPO, and the lack of detailed information required to fully value ABABA, it may be prudent for shareholders of Yahoo and Softbank (OTCPK:SFTBY) to hedge their positions prior to the IPO.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may consider buying Puts on AMZN prior to the Alibaba IPO