What Will Happen to Tech Stocks When Alibaba Makes Its Initial Public Offering?

Guild Investment Management |

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The press is full of news about the coming U.S. initial public offering (IPO) by Chinese internet giant Alibaba ($BABA). This will be the largest IPO in U.S. history, and should raise over $21 billion from investors. Alibaba is already the world leader in B2B, B2C, and mobile commerce -- and the business is still growing rapidly. Alibaba’s various platforms such as AliExpress, 1688.com, Taobao, and TMall efficiently connect manufacturers, wholesalers, retailers, and consumers -- in China and around the globe. What we find even more important for investors is that unlike some other large e-commerce companies, Alibaba’s platform produces profits, and growing profits is the key to longer-term stock performance.

What the press has not explained is that Alibaba is just part of the story. Airbnb (which facilitates the rental of residential rooms directly from owners), Dropbox (which offers storage, access and sharing capability form the cloud), Uber (an online car service competing with traditional taxis) and Box (a competitor of Dropbox) are all coming public soon -- and several of them may have valuations of about $5 billion.

Thus about $40 billion of new issuance of securities in the U.S. will soon take place, and many buyers of these stocks may be mutual funds who currently own established technology stocks.

Will they sell Apple (AAPL) , Amazon (AMZN) , Google (GOOG) , and Facebook (FB) to raise money to buy these newly issued stocks? Possibly, and we view Amazon as especially vulnerable. BABA is very profitable, and AMZN is only marginally so. BABA is much bigger than AMZN, and is growing faster. We’ll let you be the judge. (We do not own AMZN, and we are not short AMZN.)

BABA, of course, has its own issues related to corporate structure and governance. As with other Chinese firms whose securities are listed in the U.S., buyers will actually be purchasing shares of a holding company in the Caymans. We recommend investors perform due diligence to know exactly what they are buying.

Investment implications: With tens of billions of dollars’ worth of new tech stock issuance coming, led by the biggest IPO in history, we believe that tech stalwarts such as AAPL, AMZN, GOOG, and FB may come under pressure as fund managers make space for the newcomers. Given AMZN’s razor-thin margins, we believe it could be especially vulnerable if buyers put confidence in BABA’s reported earnings numbers. We suggest investors make a shopping list to look for bargains if this burst of tech IPOs does indeed cause significant pressure on leading stocks in the sector.

 
 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
BABA Alibaba Group Holding Limited American Depositary 90.48 0.62 0.69 11,718,827
FB Facebook Inc. 115.40 0.30 0.26 25,070,364
AAPL Apple Inc. 109.90 0.41 0.37 26,527,997
AMZN Amazon.com Inc. 740.34 -3.31 -0.45 3,561,307
GOOG Alphabet Inc. 750.50 2.58 0.34 1,452,484

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