MorningWord 9/15/14: $BABA Gonoush

by Dan September 15, 2014 9:35 am • Commentary

This week offers no shortage of headline events that could serve as the near term sentiment top of the current bull run: the FOMC’s  second-to-last meeting prior to the end of QE, the largest IPO ever of a company unknown to most Americans, earnings and guidance from a couple U.S. mega-cap multinationals (FDX & ORCL) and capped by Apple’s hotly anticipated release of the iPhone 6.

I suspect it will just be another week in the bull market, but if I were to pick one event that we will look back and say I remember where I was that day, it would be the Alibaba IPO.  By no means am I saying it will mark a top in the market, but it got me thinking back to last decade’s Google’s IPO and what a watershed event it was for the market.  Google was the post-tech bubble crash mega deal that cemented the fact that the technology famine that lasted from early 2000 to early 2003 was over. While the deal hit its share of speed bumps leading up to the ipo, the period since has been the stuff of market legend.  Google is now the third largest market cap in the U.S. (5% behind number 2 Exxon), is overtaking Microsoft and expected to register more than $53 billion in sales this year!

This morning the news on BABA is that they are raising the range and up-sizing the deal due to high demand.  I keep getting the question from all sorts of investors, many whom have just heard of the company, should I go in?

I am not a registered investment adviser, but I can tell you that I will likely try to buy some on or near the open using a limit price.  Why?  Because the deal has to work, and every one involved knows it.  That doesn’t mean it will be a great long term investment, it just means that there is probably the opportunity for a short term trade if the stock does not open too much higher than its IPO price.

There are a couple examples of BIG offerings of late that are fresh in investors’ minds, but none get close in size to BABA.  The largest and most disconcerting was the failed Facebook offering with technology failures at the Nasdaq and a few large anchor investors pulling out at the eleventh hour. By all indications, the NYSE has been working overtime to make sure BABA goes off without a hitch.  The demand on both the initial print and in the aftermarket looks like it is off the charts.

While Google’s early trading after its IPO is ancient history, it’s good to go back for comparison’s sake and see how the stock initially traded.

On August 19th 2004, Google offered 45 million shares (split adjusted ~22.55 million) at $42.50 (split adjusted $85), raising almost $2 billion, and closing its first day as a public company with a market cap of about $23 billion.  What’s amazing is that in 10 years since, Google has not traded below its ipo price for a second, a period that includes the financial crisis:

GOOGL 10 yr chart from Bloomberg
GOOGL 10 yr chart from Bloomberg

The opening tick of Google was $50.05, up almost 18%, trading as highs as $52, and as low as $48, only to close basically where it opened.  The next day the stock opened unchanged and then closed up $4 or about 8%.  A month later the stock was $60, up 50% from the IPO, and you know the rest.

As we look towards this Thursday’s expected pricing of Aliababa (BABA), the company is expected to raise about $22 billion in the offering (nearly 10x the size of Google’s IPO), assigning the company a market cap similar to that of Bank of America near $175 billion.  This is no normal IPO for the simple fact that the market cap of BABA will already put it among one of the largest companies in the world.

With that in mind, this is not the sort of investment that is likely to triple or quadruple over the next few years, unless you put decent odds on BABA becoming the largest market cap company in the world.  While it’s a truly impressive Chinese internet juggernaut, the odds are likely stacked against it growing gangbusters simply given its already large size and scope.  So we’ll keep our focus on the short-term trading opportunity, and look for smaller pastures for longer-term investments.  Frankly it irks me a bit that this company that few Americans have heard of is about to be anointed one of of the largest market capitalizations in the world.  I suspect history will not repeat itself in the case of BABA, as compared to Google, I would be very surprised that at some point in the next few years BABA trades below its IPO price, but placing a bet as such anytime soon would be a bit premature.