The recent big news for stock investors was the much-hyped and largely unsuccessful Facebook (NASDAQ:FB) IPO. A combination of a last-minute surge in the supply of shares for sale, secret downward revenue guidance and general bearish market sentiment caused Facebook shares to sell off below their IPO price of $38, and to date the selling continues.
Investors who participated in the IPO who did not flip the shares on the first day of trading are sitting on a paper loss in the stock. The failure of FB shares to move higher after the IPO does not bode well for shares of Chinese Internet giant Sina (NASDAQ:SINA) which operates Weibo, the closest thing China has to FB.
With several high profile and valuation U.S. Internet IPOs on the way, I expected Sina shares to run even higher with the FB IPO this year. According to last year’s playbook, the FB IPO would boost the value of Sina’s Weibo and allow the company to spin off the division in a separate IPO with huge profits. During the past year, an unforeseen development occurred as the pricing and valuation of Chinese social network Internet stocks diverged with similar U.S. Internet stocks such as LinkedIn (NYSE:LNKD) and FB. Despite a continued rise in the valuation of illiquid FB shares in the private market, shares of Sina sold off. With the FB IPO failing to boost Sina shares, it is time to cut our loss and sell SINA.
Another casualty of the unsuccessful FB IPO is Apple (NASDAQ:AAPL), though I am certainly not selling. Many investors sold shares of Apple in order to free up cash for the FB IPO. Now that the FB IPO has flopped, the money is starting to flow back into shares of AAPL. The valuation of AAPL shares is still cheap, and Apple fever in China continues to spread. Last month, a teenager in the western city of Chengdu sold one of his kidneys in order to buy an iPhone and an iPod. That is how hot Apple is in China today. As money flows back into Apple shares and the company continues to execute well in the post-Jobs era, I remain bullish on the stock.
Last week the HSBC Flash Purchasing Managers Index (PMI), an indicator of China’s industrial activity, fell to 48.7 in May from 49.3 last month. It marked the seventh straight month that the HSBC PMI has been below 50, indicating contraction.
I am not concerned about the slowdown in China’s manufacturing sector because it is offset by continued growth in consumption and retail sales. The Chinese economy is shifting from an industrial economy to a more diversified economy with larger service sector. In any event, the slowdown in manufacturing will push Beijing to be more aggressive in its monetary easing policies. The easing should help support asset valuation in China.