Alibaba Group is gearing up to be largest initial public offering of all time … and while that’s great news for Alibaba IPO insiders and their Wall Street helpers, all it does for retail investors is increase the odds they’ll do something dumb with their money.
Like invest in the latest overhyped IPO.
Never mind that the Chinese e-commerce giant is going public at a time when some very intelligent investors are worrying about overheated technology stocks — even going so far as to use the B-word. (That would be “bubble.”)
IPOs aren’t geared to work in favor of retail investors, and the Alibaba IPO — which could top $20 billion by a wide margin — won’t be an exception.
Indeed, the whole point is to make as much money as possible for current stakeholders — like Yahoo (YHOO) — and their Wall Street underwriters and advisers.
The Alibaba IPO is already one of the most hyped market debuts in recent memory, in league with Facebook (FB) and Twitter (TWTR). With the Alibaba IPO hype going into overdrive with talk of the biggest offering in history, the pull for regular old retail investors might be too strong to resist.
And that would be too bad.
Alibaba IPO: Retail Investors Need Not Apply
That’s not to say that Alibaba can’t be an excellent investment. As a sort of Chinese equivalent of eBay (EBAY), Amazon (AMZN) and Google (GOOG/GOOGL) all wrapped up into one, Alibaba has impressive top- and bottom-line numbers. That’s partly why the Alibaba IPO has been hotly anticipated for years.
For fiscal 2013, Alibaba’s revenue grew by more than half to $7.5 billion. (For the sake of comparison, eBay had annual revenue of $16 billion last year.) As for earnings, full-year profit soared 400% to $2.85 billion.
Alibaba dominates e-commerce in the world’s most populous country. China’s middle class is booming. So is Alibaba. There’s no doubt that it’s an exciting company. No wonder the Alibaba IPO is projected to give the company a valuation of perhaps $150 billion, making it bigger than Amazon.
But that doesn’t make the Alibaba IPO a good fit for retail investors.
First off, overhyped IPOs can still flop. Just look at what happened to Facebook. The Alibaba IPO is unlikely to be a repeat performance — if only because the underwriters and exchanges learned a hard lesson — but current weakness in the tech sector does up the risk.
Besides, retail investors are hardly assured of access to shares in the Alibaba IPO at the prices they want. That sort of thing is reserved for preferred clients.
And if Alibaba stock has a bright future after the Alibaba IPO, surely you can wait before diving in.
So what if you miss an opening-day pop? You might also avoid an faceplant.
Play a longer game, and the upside will still be there.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.