The most anticipated IPO of the year is finally here, and the offering is living up to the hype in a number of ways.
Shares of Chinese e-commerce company Alibaba (BABA) are set to open for trading on Friday, Sept. 19 with a price range of $60 – $66. The deal is the largest in history of public offerings and pits the market capitalization initially at $160 billion, larger than that of Boeing (BA), Home Depot (HD) and almost equivalent to the $172 billion value of chip giant Intel (INTC).
How hot is this deal? White hot.
The top fifty institutional funds by assets are being allocated roughly 80% of the stock of the syndicate offering, which leaves thousands of fund managers that thought they were important clients out in the cold as well as tens of millions of retail investors that will all have to purchase shares after the stock opens for trading. Surely, if Alibaba doesn’t open at $90 – $100 on the first tick, both fund managers and retail investors will provide strong bids.
As the largest provider of e-commerce to the fastest growing class of consumers on the globe, Alibaba is a gem holding for those the want to participate in China’s massive transformation from an almost exclusively manufacturing economy to one driven by consumer spending and services. Balancing imports and exports is a directive of the Chinese government, and Alibaba controls 80% of the e-commerce space.
The numbers for Alibaba tell a strong story going forward. Alibaba has upwards of 280 million active users that place more than 11 billion orders per year. So, 76% of all mobile retail goods purchased in China came from Alibaba. Net income in the latest quarter jumped 179% to $1.99 billion while revenue increased by 46% to $2.54 billion, and costs grew by 68% to $736 million.
For a company that delivers 1.7 billion more packages per year than UPS, Alibaba’s statistics garner investor enthusiasm. Those that have been through the ups and downs of Facebook (FB), Twitter (TWTR), Mobileye (MBLY), GoPro (GPRO), Tesla (TSLA) this past year can generally be happy with the way these stocks have traded against the inherent volatility. The trading in BABA will likely be no different.
Based on the history of major league e-companies coming to market, large funds like Fidelity will get only a portion of what they intend to own. Such was the case in the Google (GOOG) and Amazon (AMZN) IPOs, where leading funds established big positions from open market purchases so those stocks could move the needle within their families of funds.
If Alibaba shares open below $75, I would take a full position in the stock. Alibaba will likely open somewhere above $80, at which point, I recommend taking a one-third to one-half position. BABA stock is going to trade to $100 at some point in the next six to nine months.
Bear in mind, the initial lock-up period for insiders to sell into the open market is only 90 days out, a much shorter period than the usual 180 – 270 days for most offerings. As the lock-up date approaches, I expect BABA insiders to sell for the higher profit. Therefore, Alibaba’s price will fall to an attractive entry point for investors to buy into for the long term.
Alibaba’s IPO will certainly be worth watching.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and up to 4x greater income.
