It didn’t take an investment banker to figure out why Alibaba decided to list its initial public offering on the NYSE rather than with the Nasdaq OMX (NDAQ) group. More than two years after blowing the Facebook IPO (FB), the Nasdaq’s reputation is still in tatters.
Indeed, if there were any doubts as to why Alibaba chose the NYSE — owned by exchange operator IntercontinentalExchange (ICE) — they were dispelled by a new report. Anonymous sources told Reuters that the Facebook debacle was the deciding factor in where to list the Alibaba IPO. As Reuters reports:
“Alibaba executives worried about Nasdaq’s ability to handle their $21 billion initial public offering later this month, since the exchange botched Facebook’s market debut two years ago.”
Heck, even after convincing Alibaba executives that it had fixed the problems that messed up the Facebook IPO, the Nasdaq still failed to win over the Chinese company for one of the largest IPOs in history.
That goes to show how hard it is to regain a good reputation once it’s tarnished in such spectacular fashion. Like a food poisoning outbreak at a fast-food chain, the damage can last for years even after the problem has been cleaned up.
That’s bad news for anyone holding NDAQ stock. At a time when trading volumes are in steady decline — perhaps even secular decline — initial public offerings are more important to exchange operators like NDAQ and the NYSE than ever.
Nasdaq: A Market Laggard
To underscore how much of a problem the lingering stink of the Facebook IPO is for NDAQ, consider that Alibaba rejected a Nasdaq listing despite it having a huge built-in advantage. As Reuters notes, Alibaba could have sold almost $2 billion in stock with no effort at all, because a Nasdaq listing would have automatically put Alibaba into the Nasdaq 100.
That index of the 100 largest non-financial companies in the Nasdaq Composite is widely tracked by passive mutual funds and exchange-traded funds, all of which would have had to buy Alibaba to conform to the Nasdaq 100. And even that $2 billion figure is conservative because of “secret indexers.” That’s where the manager of an active fund covers his butt by manually tracking some benchmark index.
After trailing the S&P 500 for most of 2014, NDAQ stock finally caught up in August. For the year-to-date, NDAQ is up about 8% to only match the performance of the broader market. Indeed, with its superior dividend, the S&P 500 has offered a smidgen more total return this year.
It’s no mystery as to why. Growth is hard to come by for NDAQ. Profits and revenue were actually lower in the most recent fiscal year than they were in 2011. Equity trading volume is forecast to remain essentially flat until 2017, at least — and with a depressingly weak growth trajectory thereafter.
NDAQ stock looks rather inexpensive, going for less than 13 times forward earnings, but sometimes stocks are cheap for a reason. A tough trading environment and the overhang of the Facebook humiliation look to hobble NDAQ for a while yet.
At best, NDAQ is a hold.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
