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The Alibaba IPO is a week away, and promises to be the largest initial public offering ever. Here are four burning questions about the e-commerce giant.
The largest initial public offering in U.S. history is reportedly just a week away, and it’s doubtful many Americans have ever heard of the company going public.
Alibaba is the name of the company. It’s China’s largest e-commerce company, operating a variety of businesses including online web portals, online retail and payment services, a shopping search engine and cloud computing services. It generated $9.3 billion in sales in the 12 months ended June 30.
Now it’s headed for a U.S. market debut. Just how big will the record-setting Alibaba IPO be? That’s one of four burning questions I have about the company’s mysterious yet much-anticipated debut:
How big will the Alibaba IPO be?
This week, the Hangzhou, China-based company announced plans to offer 320 million shares at a price range of $60 to $66. At the midpoint of that expected range, Alibaba would command a market value of $161 billion.
The company hopes to raise $20.2 billion in its IPO. If it succeeds, it would be the largest IPO by far to ever go public on a U.S. exchange. The current record is $17.9 billion, set by Visa’s (NYSE: V) IPO in 2008.
Alibaba’s IPO is set to price next Thursday, Sept. 18, and debut on the New York Stock Exchange the following day under the ticker symbol BABA.
Why are people so excited about the Alibaba IPO?
The sheer size of the company is part of it. So is its tie to Yahoo! (Nasdaq: YHOO).
Yahoo has a large stake in Alibaba, with nearly 524 million shares. Those shares should be worth at least $7 billion, considering that was the price paid for the 523 million Alibaba shares Yahoo sold two years ago.
Yahoo paid $1 billion for a 40% stake in Alibaba in 2005. Despite reducing its stake to 22% two years ago, Yahoo stands to make a lot of money from the Alibaba IPO. The value of the Alibaba shares Yahoo bought in 2005 comprises a significant chunk of Yahoo’s total value today.
So the thinking goes: if Alibaba has been a big money maker for Yahoo, perhaps it will flourish as a public company.
What will be the impact on Yahoo shares?
Since Alibaba’s IPO price range was announced on Monday, Yahoo shares have risen 4.5%. In the four months that followed Yahoo’s August 2005 purchase of Alibaba stake, Yahoo shares were up 27%.
If Alibaba raises as much money as it thinks it will next week, then Yahoo should at least get another nice short-term boost. With its stake reduced to 22%, Alibaba’s long-term impact on Yahoo shares could be somewhat muted. But the two companies are often mentioned in the same breath, and on Wall Street that means something.
Should I invest in the Alibaba IPO?
In a word, no.
Alibaba may turn out to be a fine stock. Chances are probably better that it will be than it won’t. But getting in early on an initial public offering is always risky business. There are simply too many unknowns when a private company goes public – no matter how much hype surrounds its debut. Case in point: the Facebook (Nasdaq: FB) IPO.
Few IPOs have been as hyped as Facebook’s was in the months leading up to its May 2012 debut. And yet there was a technical glitch with the Nasdaq exchange in the company’s first day of trading, the offering price gave Facebook a lofty valuation, and suddenly its much-anticipated IPO was a disaster.
Facebook shares were essentially flat on their first day of trading. Within three months, the stock had fallen by more than 50%. It took 14 months for Facebook to even get back to its IPO price.
Today, Facebook is a good stock. Shares have now doubled since going public, and the stock is up 72% in the last year. If you waited a year after Facebook went public before getting in on it, you made a lot of money. If you got in early and sold the stock after six months, you would have lost your shirt.
IPO investing is always a risk – no matter the company. My advice would be to take the wait-and-see approach with Alibaba. If the stock turns out to be worth its anticipated $161 billion market cap, then six months from now it might be worth the investment. Sure, you may miss out on some early gains. But this is a company that should be around for years, and perhaps decades, to come. If you invest in the first six months, you’re technically still “getting in early” on it.
The Alibaba IPO may be a rousing success. But it’s not worth the risk.
Just ask the people who invested in the Facebook IPO.
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