Why You Should Buy Alibaba Stock After the IPO Date

Those who try to get in at the ground floor usually can't, and those who end up buying high are punished

   

alibaba offices Why You Should Buy Alibaba Stock After the IPO Date
Source: Alibaba

People haven’t used as much Internet bandwidth discussing the Alibaba IPO as the World Cup, but it’s probably a close second.

Indeed, the Chinese Internet giant has captured the imagination of financial pundits for month, and for an obvious reason:

Everything about Alibaba is huge.

Sales are expected to hit $420 billion this year, dwarfing rivals Amazon (AMZN), which reported $74.4 billion in sales last year, and eBay (EBAY), which generated $16 billion in the last fiscal quarter.

Alibaba even claims that it has 300 million customers, which is roughly the size of the U.S. population.

Granted, those kind of numbers bring up questions such as “Can Alibaba keep up that torrid pace of growth?” or “Is its sky-high valuation, which has boosted investor Yahoo (YHOO), justified?”

But I want tackle a more vital question today — merely, should investors buy Alibaba stock on the date of its IPO (which some expect to happen on Aug. 8)?

Nope.

Even if you’re one of the lucky few who can place an order on the first day of trading — and that’s not happening unless you work for a hedge fund or your last name is “Buffett” — the recent history of big tech IPOs is a mixed bag at best.

Some companies that surged in their IPOs such as Groupon (GRPN) flopped afterwards. Others such as Facebook (FB), which had a disastrous offering, have done spectacularly well in subsequent months.

Regardless, moving heaven and earth to get on the ground floor of most IPOs over the long run seems to be a waste of time. You might get the first-day pop if you’re lucky, which you probably won’t be, and then the shares rarely stay at those elevated levels (a lesson that can be derived from recent tech IPOs).

Alibaba, of course, is a different creature. Unlike many other tech companies that have jumped into the deep end of the IPO pool, Alibaba is profitable, earning $1.73 billion from operations in the second quarter, up 60% year-over-year. In fact, when the Alibaba IPO date comes, you can bet the stock is going to do well — it could conceivably double or even triple in its debut.

But because you’re the individual investor with little buying power, you’re probably getting in after those gains have been realized, and that’s when you have to worry about the Wall Street vernacular “priced for perfection.”

Namely, after that exciting first day, even the slightest hint that things aren’t going precisely as analysts expect will send the shares plunging.

And if you want to buy Alibaba, that’s the time to do it.

That time might not come for weeks, months or even a year, but investors are wise to avoid joining the bandwagon for any stock right away. If you’d like to see why, let’s stroll down memory lane and look at other recent IPOs that took a breather after the offering — it might prove useful for people who can’t stop counting down to the Alibaba IPO date.

GrubHub (GRUB)

IPO Price: $26 per share
First-Day Performance (4/4/2014):
Up 31% to $34.
Lowest Point Since IPO: $30 (Down 11.7% from first day)
Current Price: $35 (Up 16% from bottom)

GrubHub’s performance is a bit of a head-scratcher. The Chicago-based company’s first earnings as a public company were awesome, with profit nearly tripling and revenue doubling. Still, its performance since its first closing price is only a gain of 3%. GRUB also has been mentioned as a takeover target after Priceline’s (PCLN) deal for OpenTable (OPEN).

Twitter (TWTR)

IPO Price: $26 per share
First-Day Performance (11/7/2013): Up 61% to $44.90
Lowest Point Since IPO: $29.51 (Down 34% from first day)
Current Price: $40.50 (Up 37% from bottom)

What went wrong? Wall Street worries that the microblogging site isn’t growing as fast as it should, and analysts often compare it unfavorably to Facebook. The company is in the midst of a management shuffle as it makes a big push to attract fans of the World Cup to its site. Shares are still trading under their closing price on the first day of trading.

Facebook (FB)

IPO Price: $38 per share
First-Day Performance (5/18/2012): Up marginally to $38.23.
Lowest Point Since IPO: $17.55 (Down 54% from first day)
Current Price: $67.20 (Up 283% from bottom)

After Facebook’s disastrous IPO, many pundits seemed to think that the party was over for the pioneering social network. It’s safe to say that the people who bailed on the stock when things got tough probably regretted their decision later.

Yelp (YELP)

IPO Price: $15 per share
First-Day Performance (3/2/2012): Up 64% to $24.58
Lowest Point Since IPO: $14.10 (Down 43% from first day)
Current Price: $77.30 (Up 448% from bottom)

Yelp hasn’t posted a single profitable quarter over the past two years, though revenue continues to climb. Like GrubHub, Yelp also spiked after the Priceline acquisition of OpenTable on the same M&A hopes. Results were better than expected in its most recent quarter.

Groupon (GRPN)

IPO Price: $20 per share
First-Day Performance (11/4/2011): Up 31% to $26.11
Lowest Point Since IPO: $2.60 (Down 90% from first day)
Current Price: $6.80 (Up 161% from bottom)

What went wrong? Andrew Mason might have had the genius to develop Groupon, but he proved to be a terrible choice as CEO, and the company suffered as a result. Many advertisers also complained that the online coupons were more trouble than they were worth. GRPN continues to struggle, though the company recently posted better-than-expected results.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @jdberr.


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