Retail investors should be wary of Alibaba hype if they have missed out on the ‘IPO pop’

17th September 2014

Chris Beauchamp, Market Strategist at IG Group, discusses what to look out for in Alibaba’s upcoming IPO:

 Alibaba’s IPO is finally upon us, and the hype and enthusiasm is still going strong. The IPO price range has been raised, clearing the way for the listing to be declared the largest IPO in history.

However, once the excitement has subsided, the cold light of day will dawn and given the history of Chinese and tech-listings it is unlikely to be a quiet ride. The high expectations that preceded the listing have meant that the shares will enjoy a post-IPO ‘pop’ that could see them gain over 20% on the first day – the IG grey market on the closing market cap suggests that the shares will gain that much on Friday.

However, for those who missed out on the IPO price, is it wise to go chasing after the shares in the weeks to come? The IPOs of Facebook and Twitter are instructive here, given that both firms saw heavy price declines in the months after their listing. The same fate might befall Alibaba – even given its impressive sales and profit growth.

One major factor will be what Alibaba insiders, i.e. its senior management team, do with their shares. Of the IPO proceeds, around 61% will go to executives and investors such as Yahoo! that have been with the firm for many years. However, this means that less than 40% of the proceeds will actually go to Alibaba itself, a figure smaller than that seen for Facebook at 43%.

Having made sure that only a small amount of the company is actually up for sale the firm has managed to maintain demand and allowed it to attain the magic ‘largest IPO’ name. Alibaba management will be selling stock in this IPO, weakening the case for investing in the shares following their debut on Friday.

Instead, most ordinary retail investors should probably wait for the hype to subside. Perhaps the sensible decision would be to allow one or two sets of quarterly results to come out before making a decision on investing. A lot of the good news is in the price now, and simply meeting expectations may not be enough for Alibaba shares to sustain an upward move.

The share prices of Facebook and Twitter eventually recovered, and in fact the former has had a great 2014 so far, up almost 40% versus 3.4% for the Dow and 9% for the Nasdaq. But this has taken time. Alibaba’s entry into publicly-traded markets will be greeted with enthusiasm but sustaining that momentum in the face of such a high valuation will be a tricky task.

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