IPOs: 2 To Save For And 2 To Stay Away From

Includes: BAC, GE, KKR, SYF
by: Nicholas Durante


First Data is gearing up for an IPO with huge upside potential.

High P/E ratio should scare away investors from the Alibaba IPO.

GE spinning off its retail finance unit will benefit GE and Synchrony Financial.

Save For: First Data

This one is on the way. Unable to reduce the massive $23 billion debt from its 2007 leveraged buyout from Kohlberg Kravis Roberts & Co. (NYSE:KKR), First Data will most definitely be back on the market, and very soon to help pay down the debt. They are preparing the investment community by posting their financial results on their website here.

Why Invest?

Combine the global expansion of electronic payment processing with the continuous transition of older payment methods towards newer electronic ones, and you can see there is huge upside potential for First Data. An IPO can help alleviate a lot of stress to cut costs to help pay down their debt, and allow them to focus on the business and future growth. With annual sales exceeding $10 billion, First Data is going to be around for a long time, and investors should put away their pennies for this IPO.

Stay Away From: Square

I feel this IPO will happen in the near future, but it won't have the glitz and glam of a tech stock like some expect. I would not be surprised if this stock comes out of the gate breaking a $3 billion market cap based on hype, but I'm not sold on it.

Why Not To Invest?

The big money in payment processing is to reach the heavy hitters in consumer goods and services. While running a credit card transaction via cell phone or tablet may seem like a great idea, it is still a small niche in a much bigger market; and in my opinion, it is not a multi-billion dollar niche. Square might have something else in the works to reach the broader market, but it can be an uphill battle with their high transaction charges.

So I would like to defer to the numbers, but unfortunately there are not too many readily available yet. While Square is clearly processing billions and billions of dollars, it only breaks down to a few hundred million in net revenue when all is said and done; and is perhaps the reason for raising more money. The IPO has me wondering if this company is even near profitability, and if not, how long it will take until it is. These $5 billion valuation analysts have put on the company are based on their future projections, however, I fear the company may be close to stabilizing; especially considering the fierce competition from the big boys like PayPal and Bank of America (NYSE:BAC) who will not go gentle into that good night.

Stay Away From: Alibaba

The massive hype surrounding an IPO like this can be very intimidating to an investor. However, the fact is Alibaba is China's largest e-commerce company. Considering the massive market, it's no wonder there is so much hype surrounding this IPO.

Why Not To Invest?

There is too much hype. The high valuation can put the P/E ratio too high. So unless Alibaba can show growth of noteworthy profit margins, the long-term return might not be there. This may be the biggest Chinese IPO, but Chinese IPOs have underperformed the U.S. market considerably. Alibaba is a company that will be around for a while and continue to grow, however, considering the P/E ratio I'm expecting, I can find much better places for a better return.

Save For: GE Consumer Spending (Synchrony Financial)

General Electric (NYSE:GE) will be spinning off its retail finance unit in an IPO. The company will be Synchrony Financial (NYSE:SYF). This is a strong company with deep roots in the industry. The IPO will allow GE to cut their risk of the division, while also leaving potential for Synchrony Financial to grow.

Why Invest?

Once again, the world is moving further from cash and more towards plastic. GE spinning off their credit card unit will help support Synchrony's growth potential. Having their own company can place them in a more aggressive position to increase sales and grow the overall size of their business while separating itself from GE's risk tolerance. Now is not only a good time for private-label credit cards, but a good time for you to save your money for the Synchrony Financial IPO.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.