Will Alibaba’s IPO cause the US stock market to fall?

Will Alibaba’s IPO cause the US stock market to fall?
Will Alibaba’s IPO cause the US stock market to fall?

Will Alibaba’s IPO cause the US stock market to fall? There has been much anticipation for the upcoming IPO of Alibaba – a (currently) privately owned Internet based e-commerce business resembling eBay/Amazon/PayPal/Google. It is a Chinese based business, which has expanded phenomenally as consumers in China have gained more and more access to the internet and online consumer shopping. But will its upcoming IPO cause the stock market to fall?

Alibaba started as a business to business portal to connect Chinese manufacturers with overseas buyers. The Economist magazine, as at March 2013, had valued the company between $55 billion (US) to more than $120 billion (US). The Initial Public Offering (IPO) scheduled to debut in September, could top $16 billion and become the biggest Technology IPO listing ever.

With funds managers scrambling to add Alibaba to their portfolio, they need to make room by selling some of their existing stock. Underperforming companies are likely to be shown the exit, which could result in a sell-off over the next few weeks. Does this mean there is a potential for a $16billion decline in the total stock market value?

Earnings Season

The latest earnings season may hold the key. Any company that didn’t provide a positive outlook for the coming quarter might just result in a downsizing of fund portfolio’s. Amazon.com Inc. (NASDAQ:AMZN) and Google (NASDAQ:GOOG) are two stocks that come to mind. Both failed to impress buyers to accumulate stock after their recent earnings reports, whereas the broader stock market has continued to push into new long-term highs.

Rival Chinese tech company’s already listed in the US include Baidu.com, Inc. (ADR) (NASDAQ:BIDU) and Tencent Holdings Ltd (OTC:TCEHY). Since listing, these company’s have performed well. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) listed on the 5th August 2005 @ $6.60, and closed at $216.08 on Tues 26th August. That’s a 3,173.9% gain over 9 years, or an average 352% per annum. Tencent Holdings Ltd (OTC:TCEHY) on the other hand, listed at $1.48 on the 3rd Nov 2008 and closed at $16.74 on Tues 26th August for a 1,031% gain over 5 and a half years, or an average of 187% per annum.

A similar performance to Baidu.com, Inc. (ADR) (NASDAQ:BIDU) could see Alibaba worth more than $500 Billion (US) by 2023, rivalling the current market values of Google (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL). Of course, this would depend on broader economic conditions and the performance of the stock market in general.

What do the analysts think?

To the upside, some analysts are touting that the IPO for Alibaba will exceed $200 billion, making it one of the top 20 biggest companies listed in the US. This outside estimate would have an ever bigger impact on the current stock market activity.

Over the next two weeks, as the Alibaba management conducts a two week investor road show, we will start to see more headlines and gain a better picture on the subscription to the IPO. The bigger it is, the greater the need for funds to invest, and the wider the impact on the stock market.

This, however, is more likely to play out in the Technology sector rather than in the broader stock market as a whole. Hence, the NASDAQ index has a potential to see an increase in volatility on the short-term.

How to gain exposure

Investors can look to gain exposure to the Alibaba IPO directly, or indirectly through ownership in Yahoo! Inc. (NASDAQ:YHOO) – who holds a 22.5% stake in the Chinese e-commerce business. Yahoo! Inc. (NASDAQ:YHOO) has been range bound since April, but in recent weeks is showing an increase in buyer activity with the share price rising from $33 to the recent close just under $38. (AIE has been running a Covered Call strategy on Yahoo! Inc. (NASDAQ:YHOO) since late April).

Should the listing of Alibaba prove strong, this has a good potential of taking Yahoo! Inc. (NASDAQ:YHOO) along for the ride. Of course, all investments need to be managed and there is always Risk that investors react negatively. Quite often an IPO will be hyped up by the marketing firm, list at a higher price than expected, and have investors selling shares early to take a profit. For this reason, if an investor cannot participate in the IPO, it can at times be savvy to monitor the share price over the first few months to accumulate stock at better prices.

Our View

Our view is that Alibaba will have an impact on the stock market. The probability of Tech stocks being sold by institutions to cover the investment required to participate is high. Whilst there is a large amount of capital on the sidelines with many funds, more exposure to the IT sector might not be the approach these funds adopt. Hence, reducing exposure to less (perceived) performing companies and the opportunity for the largest Tech IPO in history. We view the Tech sector as having a potential to decline over the next few weeks with volatility increasing, followed by a resumption of the broader long-term uptrend post-IPO.

To find out more about our strategies CLICK HERE.

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