Want a Piece of the Alibaba IPO? Skip BABA, Buy Yahoo Stock

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The Alibaba IPO is almost upon us, and that means there will soon be a lot more millionaires on planet earth than there are right now.

yahoo stock, alibaba ipoThe new offering will be the largest in history, with some 320 million shares set to make their debut at $68 per share, a price that’s up from an earlier peg between $60 and $66. At that price point, the Alibaba IPO will raise nearly $21.8 billion, a sum that far exceeds the nearly $18 billion record set by Visa (V) in 2008.

To a capitalist like me, that’s something to applaud, revere and celebrate. So given this attitude, you might be surprised to discover that I actually don’t recommend buying Alibaba stock as soon as it debuts Friday. In fact, the much better move is to play the shares indirectly via Alibaba minority owner, Yahoo (YHOO).

Now don’t get me wrong, I like Alibaba, and I expect the shares to do well. And, if you are fortunate enough to be in on BABA pre-IPO, then it’s definitely okay to go out and shop for that new Tesla (TSLA) Model S, or that five-carat diamond necklace from Tiffany & Co. (TIF), or that new wardrobe personally designed by Michael Kors (KORS).

However, if you are planning on putting in a market order on BABA the day it debuts, then you had better be very, very careful. Many an otherwise-intelligent and patient investor got worked up into a feeding frenzy and actually lost money trying to jump in with a market order on a hot IPO while it’s going parabolic its premier-day. At least wait for BABA to calm down next week before you get in.

Yahoo Stock Has a Lot to Gain from Alibaba IPO

I do think BABA is going to be a great stock to own for the long term. Alibaba is the biggest, most successful e-commerce site ever, boasting bigger transaction volumes than both eBay (EBAY) and Amazon (AMZN) combined. Alibaba has some 279 million active buyers — a metric that easily bests Amazon’s total user base of about 244 million. And unlike Amazon, which technically has operating margins that cause it to be barely break even, Alibaba has operating profit margins of 43%.

So, what does Alibaba mean to Yahoo stock? Well, a whole lot of money, given the 22% stake the diversified search giant owns in BABA. If Alibaba performs as expected on Friday, Yahoo will get a huge windfall for its 2014 bottom line.

Some Wall Street analysts are taking the opposite view of this Yahoo and Alibaba story, claiming that you should actually sell Yahoo stock before the Friday Alibaba IPO. These pundits basically argue that YHOO stock has already moved up 23% over the past month in anticipation of the Alibaba IPO, so now is the time to jettison your Yahoo stock and take profits.

But why dump Yahoo stock when the company will own a huge chunk of the biggest e-commerce firm around, even after the Alibaba IPO?

Yes, Yahoo will have to sell some of its BABA stake post-IPO, but the company inked an agreement in July that will allow YHOO to keep more BABA shares than it had originally expected. The previous agreement stated that Yahoo would have to sell $208 million worth of shares after the Alibaba IPO; however, now Yahoo can keep a lot more, with the new deal that requires them to sell just $140 million shares.

So, just ask yourself this basic question: Will Yahoo — and more importantly, Yahoo stock — benefit from the financial boost that it’s expected to get from the Alibaba IPO?

Of course it will, and so will you if you own Yahoo stock.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/yahoo-stock-alibaba-ipo/.

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