China’s Alibaba is a global powerhouse — an e-commerce ecosystem bigger than Amazon.com (AMZN) and eBay (EBAY) combined. Within the next few months, the company will go public, and the Alibaba IPO is expected to be massive, potentially raising more than $20 billion to put it on par with some of the biggest IPOs of all time.
Not bad for a company founded in an apartment. By an English teacher.
It’s facts like these that make the Alibaba IPO one of the more interesting offerings to come around in some time. We’ve already tackled some of the trivia, though — now, I’ll answer some questions to help investors better understand the Alibaba IPO.
Q: What do I need to know before buying Alibaba IPO stock?
Note: In my article The Best Ways to Buy the Alibaba IPO, I outline how to invest in the Alibaba IPO, even if you don’t buy Alibaba stock at the IPO.
A: First and foremost, do your own homework. Things you can do to brush up include downloading the Alibaba F-1 filing, which provides tons of information about the Alibaba IPO, Alibaba stock and the business itself.
The first section I would check out is “Our Business,” which provides some insightful background.
I also would look at “Risk Factors.” While much of this section is legal boilerplate, you can sometimes glean some important information about headwinds from this section.
In the case of the Alibaba IPO, the company’s Risk Factors section notes issues with:
- The need to transition to mobile
- The importance of maintaining the ecosystem
- Political risks
A week or two before the Alibaba IPO, the company will launch its roadshow, in which it will make a number of presentations to potential institutional investors. While you won’t get an audience with Alibaba itself, you will be able to view an electronic presentation on RetailRoadshow.com. This should provide a solid overview of the company, including market opportunity, competitive advantages and margins.
Q: Should I buy the Alibaba IPO?
A: I’m glad you’re reading what I have to say, but while I provide you with information and even insight, I’m not you — which means I don’t have your same risk tolerance, your same years to retirement, etc. That’s why I suggest doing your homework.
Still, here’s what I’m considering when thinking about whether I should buy Alibaba stock.
The Alibaba IPO will be massive, exciting and attract demand from investors across the world. After all, Alibaba stock essentially will represent a way to get exposure to the fast-growing e-commerce market in China.
However, before deeming Alibaba stock worth buying, there’s a few things to keep in mind:
As you can see, the overall performance has been mixed. That’s no shock. In today’s tech market, it is extremely tough to maintain a competitive advantage and to adapt to shifts in new innovations.
But isn’t Alibaba the dominant e-commerce operator in China? Well, sure. But JD.com (JD) — the country’s No. 2 — is making headway, and even went public in the States itself. Then there’s Tencent (TCEHY), which has the highly popular WeChat mobile service.
Plus, investors should know that while China is in the process of making a heavy transition to smartphones, Alibaba remains primarily based on desktops.
Global: While China still has tremendous growth, Alibaba ultimately will need to look at international markets. But remember — the U.S. and Europe have long looked to China for growth because businesses decreasingly found it internally. So the question is … where do Chinese companies look for additional growth?
Execution: Alibaba management clearly has made savvy decisions that got the company to this point. Still, now and then, we get a whiff of something ugly. One curious business move — Alibaba recently struck a deal to buy 50% of the Guangzhou Evergrande soccer team! Alibaba has yet to explain any synergies gained from the purchase.
Valuation: Alibaba hast yet to set a price, but the speculation is that Alibaba stock could be worth as much as $200 billion. If so, that would put Alibaba stock’s price-to-earnings ratio at a nosebleed 145 — loftier than Facebook’s 81, Google’s (GOOG) 29 and Apple’s (AAPL) meager 15.
One last note: IPOs are notorious for being volatile and they are not meant to represent a large allocation of your portfolio. My recommendation is that IPOs should not account for more than 10%.
Q: When should I buy the Alibaba IPO?
A: If you do decide to invest in Alibaba, you might want to put your hands over your ears and eyes, ignore the hype and wait a few months. Newly public companies tend to be available at better prices once the media machine calms down.
Q: What is the Alibaba IPO Date?
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.