As the financial markets inch toward what will be the largest initial public stock offering ever, financial advisers appear to be taking a wait-and-see approach, positioning themselves between their clients and the $24 billion Alibaba
IPO.
“Most IPOs are overpriced at the offering, so we're going to wait until it's all over and then take a look at it,” said Theodore Feight, owner of Creative Financial Design.
Even though Mr. Feight likes the Chinese e-commerce company as an “inside track into China,” he describes himself as “cautious” about investing too early in the company that is expected to start trading later this week.
While Alibaba is not a U.S.-based company, it will trade on domestic exchanges, making it a unique entry point into a difficult-to-access Chinese market and economy. The company's status, as China-based, but not listed on Chinese exchanges, will also prevent it from being added to many of the popular broad market indexes, like the S&P 500.
Thus, while the stock won't benefit from the mountain of money investing in index-based products, it could be seen as a contrarian play on many of those indexes.
If the stock prices in the projected range between $60 and $66 per share, it will give Alibaba a market capitalization of approximately $170 billion, and the total stock offering will eclipse the $22 billion
IPO four years ago by the Agricultural Bank of China, which listed shares in Hong Kong and Shanghai.
The likely appeal for U.S. investors in Alibaba, aside from getting a piece of a record-setting stock offering, could be the chance to catch a ride on a hot stock, which has some advisers already calling for calm and patience.
“We are about to see what may be the biggest
IPO in history, which is increasing in price due to growing demand,” said Joseph Witthohn, vice president at Emerald Asset Management. “While the price may be justified, it is quite possible a slew of investors, who have possibly missed strong run-ups in other stocks, will want to buy this because they can't bear to think another boat might leave the dock without them on board.”
Because of all the hype building around the Alibaba
IPO, it is often compared the 2007 Facebook Inc. stock offering, when retail investors clamored to get on board only to suffer two years' worth of losses before the stock finally got back to its initial offering price.
For Josef Schuster, manager of the First Trust US
IPO ETF (FPX), the Alibaba attention is good for
IPO investing, in general, but he is not bullish on Alibaba.
“There seems to be plenty of demand for the deal, but it all reminds me of Facebook,” he said. “So much buzz, and they say all the order books are full, and they keep raising the price, and that probably means a lot of investors will be buying at an inflated price.”
He said the market's low volatility has helped IPOs overall this year.
“IPOs usually come to market in periods of low risk when the stock market is going up,” he said, adding that he has noticed “a lot of shifting and selling” in the last couple of weeks.
The fact that Alibaba is profitable is a key distinction that sets it apart from Facebook's
IPO, a fact not dismissed by Brian Hamilton, chairman and co-founder of Sageworks.
“It's very good news to see a technology company going public that's growing revenues and generating real profits,” he said. “Even more encouraging is the fact that the valuation is earthbound, when you look at the sales and profit multiples.”
Still, while retail investors might be drawn to the Alibaba hype, the lessons of Facebook could also help investors keep the latest
IPO in perspective, according to Nicholas Colas, chief market strategist at ConvergEx Group, a brokerage that has studied the Alibaba offering.
“Everybody knows the Facebook experience as a rocky post-
IPO period the eventually saw the stock double,” he said. “If Alibaba runs into trouble, I think there will be a recognition that we saw the same story with Facebook and it turned out okay.”
In a survey of clients and partners familiar with the Alibaba stock offering, ConvergEx found that institutional and wealthy individual investors are generally bullish on the
IPO.
Mr. Colas added that while the majority of institutional investors anticipate the initial offering price to be above the $66 range, the upside beyond that during the initial trading period is seen as limited.
