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Don’t Sell Amazon Stock to Buy the Alibaba IPO

It's easy to understand the temptation in Alibaba shares, but it's not even necessarily the best online retail prospect


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Which stock has more upside: Alibaba or its biggest U.S. counterpart, (AMZN)? And if you had, say 100 shares in Amazon stock, would you pawn them in a heartbeat to buy big into the Alibaba IPO?

Well, before you do anything too rash amid the crazy buzz around this upcoming new offering, if you find yourself in the situation of holding Amazon stock … keep on holding.

Amazon Stock Still Has Some Luster

One of the biggest and longest-standing complaints about Amazon stock — its breathtakingly high valuation — has actually come down in the past year amid a nearly 20% slide in AMZN. Granted, that still gives Amazon a laughable valuation of 500-plus, but a price-to-sales ratio of just under 2 is something investors can live with.

While there are some fears that the Alibaba IPO haul will be used to mount an attack on Amazon in North America, success will be extremely difficult. After all, Amazon has built a mega-brand over nearly two decades of work, complete with a sophisticated infrastructure that includes some 40 fulfillment centers — providing customers with a massive spread of products and quick shipping — bolstered by hardware like the Kindles (and soon, the Amazon Fire Phone).

Not to mention, Amazon isn’t just playing in a completely mature market — there is room for growth for the “old” e-tailer. Based on a study from Euromonitor, the North American online retail market is expected to hit $360 billion by 2017, which would represent a 14.5% compound annual growth rate.

And mobile could mean that growth will be stronger — good news for Amazon stock, as the company has invested in mobile technologies, again via Kindle and the Fire Phone.

Naturally, AMZN is about much more than just selling goods. CEO Jeff Bezos always seems to find smart ways to leverage the company’s infrastructure, and he has launched expansions into a variety of businesses that should help propel Amazon stock for the long haul.

A notable example of this is the cloud services segment (Amazon Web Services), which has turned into a massive winner. But Bezos also is moving into other areas like Amazon Fresh grocery delivery, streaming of music/video and even drones. (OK, that last one was mostly PR stunt, not substance.)

The Alibaba IPO Isn’t Perfect

Still, isn’t the Alibaba IPO better in terms of growth potential?

Not necessarily. Forget the difficulty of expanding to North America — Alibaba still has to deal with major competitive threats in China. For example, (JD), which is the country’s No. 2 online retailer, recently pulled off a successful IPO and will use its funds to bolster its position. There’s also potential trouble from Tencent (TCEHY), operator of messaging service WeChat, which would be a great brand from which to launch an e-commerce platform.

And that mobile issue is something that makes Amazon stock look much more appealing than Alibaba. You see, while Alibaba has been ramping up its mobile offerings, it is lagging and still heavily dependent on desktop.

Operating margins are falling, too. The recent announcement of a decline in margins from 51.3% to 45.3% worried investors so much that even Yahoo (YHOO) — which holds a 22.5% stake in Alibaba and is expected to enjoy a huge cash-out from the IPO — was sent lower on the news.

The other issue for Alibaba is the IPO itself. It looks like Alibaba will raise $20 billion or more at a valuation in excess of $200 billion. That sounds impressive, and it is impressive … but it’s also problematic. See, even in today’s liquid global markets, this is a substantial amount of stock to sell. In other words, it could be tough to see any significant stock appreciation. This happened with Facebook (FB) as well as other high-profile deals like Groupon (GRPN) and Zynga (ZNGA).

Besides, Alibaba will see more stock flood the market when the lock-up period expires within six months of the deal.

Amazon might have issues pop up, but we can all guarantee that a lock-up expiration won’t be one of them.

Bottom Line

As I’ve noted many times at the IPOPlaybook, patience is a good strategy with IPOs, especially those that get lots of hype.

So if you have a chunk of Amazon stock right now and are considering bailing, it’s probably best to sit tight instead.

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.

Article printed from InvestorPlace Media,

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