IPO Preview: How Individual Investors Can Profit From Alibaba's Large Public Offering

Aug.11.14 | About: Alibaba Group (BABA)


Alibaba Group is expected to have one of the largest IPOs in American history raising more than $20 Billion.

There are three potential ways for investors to capitalize off of this widely anticipated public offering.

BABA's IPO will produce opportunities for investors both directly through shares of Alibaba stock and through symbiotic growth with stakeholders Yahoo and Softbank.

According to Wikipedia, Alibaba Group (NYSE:BABA) "is a privately owned Hangzhou-based group of Internet-based e-commerce businesses including business-to-business online web portals, online retail and payment services, a shopping search engine and data-centric cloud computing services. In 2012, two of Alibaba's portals together handled 1.1 trillion yuan ($170 billion) in sales, more than competitors eBay (NASDAQ:EBAY) and Amazon.com (NASDAQ:AMZN) combined. The company primarily operates in the People's Republic of China, and in March 2013 was estimated by The Economist magazine to have a valuation between $55 billion to more than $120 billion."

Alibaba Group announced that it would be taking the company public in the United States through the NYSE. Alibaba will trade publicly under the ticker symbol BABA, and the company is expected to generate potentially more than $20 billion during its public offering, putting it on par with some of the largest IPOs in American history.

Brad Stone of Bloomberg Businessweek, in a recent article about Alibaba, reports that

"...by the standards of U.S. e-commerce companies, Alibaba's estimated $8 billion in revenue in 2013 seems a tad thin. (EBay brought in $16 billion in revenue last year; Amazon.com, $75 billion.) The number is deceiving, though, because it represents only Alibaba's commissions on sales and fees for its services. A better measure of Alibaba's power is the volume of merchandise sold through its various properties: $248 billion in 2013. Amazon did about half that; EBay, a third. Or here's another way to think about it: Last year, Alibaba facilitated the delivery of 5 billion packages from transactions on its retail websites, more than half of the total packages sent by delivery companies in China, according to its registration document with the Securities and Exchange Commission. By comparison, UPS (NYSE:UPS) sent about 4.3 billion packages and documents last year."

With some of the largest institutions in the finance world including Citigroup (NYSE:C), Credit Suisse (NYSE:CS), Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), J.P. Morgan (NYSE:JPM), and Morgan Stanley (NYSE:MS), underwriting Alibaba's public offering, how does an individual investor take part in what could be one of the largest IPOs in United States history? There are three ways that are worth looking into, for both long- and short-term profit.

First, if you are an active trader, it is worth looking into buying shares on the morning of the IPO. The public offering will receive large amounts of national media attention and the price will most likely increase dramatically during the first hours of trading. This pattern was seen most recently with two large IPOs; GoPro (NASDAQ:GPRO) and El Pollo Loco Holdings, Inc. (NASDAQ:LOCO). By managing risk and taking profits, this is a potential for a lucrative short-term trade -- if watched closely. Riding the wave of major IPOs, specifically those in the technology sector, is a common day trading strategy. Obviously "day trading" or short-term trading of any sort constitutes risk and leaves you susceptible to chasing prices that are too high, but in the case of LOCO's IPO the share price increased steadily for consecutive trading days.

Secondly, if you are more of a long-term "buy and hold" investor, the preferred route would be to wait for the IPO buzz to play out, and for the price to fall as traders who bought the shares early start selling. Do not get into BABA for a few months, but rather wait for the hype to die down. You can then buy at a lower price, and hold long-term.

If the company is going to succeed, the price will steadily rise on good earnings growth quarter after quarter. This pattern has proved to be historically accurate during large IPOs, including Facebook (NASDAQ:FB) where the price and volume were incredibly high in the first days reaching nearly $40/share with 168.1M shares traded. This boom was followed by a month of declines, where the price per share found a bottom at around $19. If you put $1,000 into Facebook at $19/share, those 52 shares would now be worth $3800. This pattern is more recently evident in the GoPro IPO , where the public offering "buzz" created high volume and accordingly elevated prices that reached $48.80/share -- the stock found an established bottom days later at $36.84/share.

The third way you could profit from Alibaba's red hot IPO, would be to buy shares of the companies that have large stakes in Alibaba, including Yahoo (NASDAQ:YHOO) and SoftBank Corp (OTCPK:SFTBY) on the assumption that BABA's public offering will be a catalyst for the companies to grow symbiotically.

  • Yahoo has an extremely large 523.6 million share stake in Alibaba, valued at around $36 billion which is almost equivalent to Yahoo's current market capitalization of $36.4 billion. According to The Washington Post, "Matthew Turlip, an analyst at financial analysis firm PrivCo, estimates the value of Alibaba at $195 billion, which would make Yahoo's stake in the firm worth about $44 billion." To put that in perspective, that's larger than Yahoo's current market cap, "which is about $33 billion," says Turlip. "So, Yahoo's 23% ownership is worth more than the total value of Yahoo's stock in the market right now." Based on Alibaba's more modest $120 billion self valuation in its IPO filing, Yahoo's ownership stake is worth about $26 billion. Yahoo's history with Alibaba began in 2005 when they invested $1 billion into the growing Chinese company, becoming a 40% owner. This IPO will be a major cash infusion for Yahoo, a company that has consistently struggled of late, but is dedicated to using the cash to invest in new and growing technology companies.
  • SoftBank Corp, "a Japanese telecommunications and Internet corporation, with operations in broadband, fixed-line telecommunications, e-commerce, Internet, broadmedia, technology services, finance, media and marketing, and other businesses," has an $80.40 billion market capitalization and owns a 34% stake in Alibaba. Softbank differs from Yahoo, because Yahoo has openly expressed its need to sell the position after the IPO in order to liquidate their large investment and use the cash for company growth. Softbank on the other hand, has no plans to sell their position in Alibaba despite the debt they have taken on during an aggressive year of acquisitions including carrier Sprint Mobile. Softbank CEO, Masayoshi Son, has now expressed interest in T-Mobile. According to Fortune "U.S. regulators have been wary of combining the No. 3 and No. 4 U.S. carriers, but Son has promised the mother of all price wars with Verizon (NYSE:VZ) and AT&T (NYSE:T) if they allow him to move forward with his plan."

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