Dear Mr. Market:

Every investor is looking for the next opportunity that looks like a ‘sure thing’. Throughout 2014 we’ve seen a plethora of IPO’s hit the market with the majority of them being well received. Currently there is a giant lurking out there and the markets have been licking their chops waiting to get a piece of it.   The stock is a behemoth based in China…Alibaba (anticipated to be listed as BABA).

Wall Street is expecting the IPO to hit the market sometime after the Labor Day holiday and this could certainly be an early Christmas present for the markets if it lives up to the anticipation. We have not seen hype like this surrounding a potential IPO since the dot-com era of the late 1990’s. Before you rush out in an attempt to participate in the IPO or buy through the open market, lets take a look at Alibaba to see if it warrants a position in your portfolio….

Summary:

It is challenging for the average U.S. investor to understand how large and diversified Alibaba is. Essentially Alibaba is: Amazon, eBay, PayPal, Cloud Services and much more wrapped up in one company. It has the fastest growing online commerce market in the world, last year it had transactions that totaled just under $250 billion! That is more than eBay (EBAY) and Amazon (AMZN) combined. To truly put the size of Alibaba in perspective let’s break down its largest components:

• Alibaba.com – A global online marketplace for international consumers – think Amazon on steroids.
• Alipay – The Chinese version of PayPal, in 2014 it processed over $620 billion in payments online.
• TMall – This platform enables retailers to sell their products directly to consumers.
• Aliyun – Provides cloud services to consumers. In 2013 it made $102 million from the services it provides.
• Tabao – China’s online shopping network – Alibaba claims it is the most popular mobile app. Home to over 7 million merchants.
• 1688.com – The leading online marketplace for domestic small businesses in China.

While the company has posted impressive numbers it has only been in existence for approximately 15 years. Jack Ma founded the company in 1999 with the goal to connect Chinese based manufacturers with overseas buyers. Today the Taobao portal features nearly a billion products and is one of the top 20 most-visited websites in the entire world. Sales generated on the website account for over 60% of the parcels delivered in China.

Fundamental View:

While the company is relatively young it has become a huge player globally. Over the last two years it has made massive investments into the U.S. market. It has invested hundreds of millions of dollars in start-ups that compliment their current model and will make their transition into the U.S. much more effective. Among the start-up companies that they have helped fund are: Tango, Lyft, Fanatics and Kabam. With several of these deals they are not only the largest investor but they have also secured seats on the company’s board of directors. It has also been reported that Alibaba is in pursuit of Snapchat. The company’s expansion is not focused only on the U.S.; they have also closed big deals in Latin American and Europe.

While the world views China as a leader in technology and commerce, the reality is actually a bit of an eye opener. The Internet is relatively new to China, especially mobile access and commerce. Currently only about half of China’s adults are Internet users while in the U.S. only approximately 10% of adults are not using the Internet.

Although the U.S. consumer has embraced online shopping they still make the majority of their purchases at brick and mortar stores and malls. The demographics are much different in China as the vast majority of consumers don’t live near any type of retail store. Over the last decade a new term has been derived for Chinese towns and villages throughout the country – “Taobao Villages”. There are literally thousands (if not more) of villages that are a significant distance from major cities that previously were self-sustaining.  Now with Alibaba they sell their goods and products throughout the country and also buy products that they previously could not find. Entrepreneurial-minded citizens are now realizing that they don’t need to move to large cities to find work.   There are villages now that offer “Taobao University” where people can learn how to sell their products online. Alibaba is changing the demographics within China and driving cultural changes.

Technical View:

It is a challenge to look at a company like Alibaba from a technical standpoint as it is not a traded stock at this point.   When the stock is traded it is anticipated to be one of the largest IPO’s in history. To put it in perspective with other recent tech IPO’s it is estimated that Alibaba will come in around $20 billion. (Facebook was $16 billion (2012), Twitter was $2.1 billion (2013) and Google was $1 billion (2004).) After the stock goes public the top-end estimate for Alibaba’s market cap is $250 billion. Some other well known companies have the following market caps: Microsoft (MSFT) $374 billion, Facebook (FB) $196 billion, IBM $190 billion, Oracle (ORCL) $184 billion and Intel (INTC) $170 billion. The timing of the IPO could be ideal as several of Alibaba’s competitors have posted impressive results earlier this year:

• Dangdang (DANG) has revenue up 31% year over year.
• JD.com (JD) posted 64% year-over-year revenue improvement in Q2 2014.
• LighInTheBox (LITB) – Orders grew 52.4% and net revenues grew 24.3% year-over-year.
• Cheetah Mobile (CMCM) – Revenues rose 139% year-over-year to $61.3 million beating estimates of $55.8 million.

Impressive quarterly results like this suggest that the Internet market in China is just starting to reach its potential and impressive growth could be there for years to come. China, the world’s second largest economy, is embracing technology and the future could be promising. However, there is one very important factor to keep in mind when looking at the numbers shared by Alibaba’s competitors. This is China and the rules of the game can change very quickly. Whether investors ignore the reality of China still being a Communist country or not, the company is at the mercy of the Chinese government. It has been documented that there are high-ranking Chinese officials that will stand to make a significant amount of money with a successful IPO launch. There are also Institutional Investors that have invested billions of dollars into Alibaba and have direct ties to the company.  James Gellert, CEO of Rapid Ratings recently stated, “Consider that the closer the ties to the Chinese government, the more vested the interests are in China to see the Alibaba IPO be successful and their stock be seen as a bellwether for Chinese technology prowess.”

Buy/Sell or Hold?

Obviously the answer to this today is an easy one as the stock is not available to be purchased at this time. When the IPO does take place it will dominate the financial headlines and will most likely be very challenging to participate in.  If you are not able to participate in the IPO we would suggest that you wait 90 days and monitor the stock. Investors that buy in at the market price will most likely be paying a significant premium based primarily on hype and emotion. The ‘talking heads’ on television and the radio will be focused on the story line of the Alibaba IPO but that does not mean that it needs to be your focus. If the global markets embrace the stock it will be a stock that will be available to investors for years if not decades to come. Buying in on the first few days of trading, at what will most likely be a significant premium, will not have a dramatic impact on an investors portfolio unless it is a huge position, and that’s not investing in a sensible and calculated manner but rather more typical of a risky speculation.
Another approach that investors could explore in order to gain exposure to Alibaba is to invest in ETF’s (Exchange Traded Funds) or Mutual Funds that will have shares of the company. There are also individuals companies that have significant investments with Alibaba: Yahoo (YHOO) has a 24% stake and SoftBank (SFTBY) with approximately a 36% position. It is important to remember that any purchases of these stocks will give exposure to Alibaba but the stock price will be primarily driven by YHOO and SFTBY. Lastly, there a number of ETF’s that will take a significant position in Alibaba and you can gain plenty of exposure in this manner along with the diversification of their other holdings.

The most important thing to remember is that successful investing is not based on emotions or publicity events. Instead think about taking a disciplined and focused approach as these are two common traits shared by successful investors, not speculators or gamblers. If you have questions regarding Alibaba or other stocks we would encourage you to contact us with the contact form attached below. You can also reach us at (888) 47-GUIDE or (888) 474-8433.