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Alibaba Headlines IPO Fall Harvest

25 September 2014 in Trading Ideas

It was hard to miss the hype surrounding the trading debut of Alibaba, the Chinese e-commerce giant.

It helped, of course, that the company’s initial public offering was expected to be the biggest ever – and easily delivered on that promise.

But the stock’s first day of trading turned things up a notch: Alibaba’s shares jumped 38%, finishing at $93.80 and giving the company a market value of $231 billion, already putting it in the rarified air of tech powerhouses like Microsoft ($385 billion) and Facebook ($220 billion).1

While Alibaba shares have recently given back a few percentage points from that first-day gain, one could understand if some investors think they missed out on a big-time opportunity in a newly issued stock.

On the other hand, Alibaba may just be the start of things.

As the Wall Street Journal pointed out earlier this month, an anticipated flood of IPOs this autumn could cap off the busiest period for new US share listings in decades. Companies this year had raised $46.4 billion through Aug. 31, the most in the first eight months of any year since 2000, according to data provider Dealogic.2

In addition to Alibaba’s debut, the market was expecting an issuance from New York office landlord Paramount Group, which the Journal said could be the largest-ever IPO by a real-estate investment trust. Traders were also readying for offer pricings by online storage startup Box and consumer credit firm Lending Club.

As the Journal explained, the rise of US stocks to record highs is allowing companies an opportunity to sell shares at attractive valuations. Money managers say many IPOs look like good bets. Some feature rapid expansion in profit or sales and offer new ways to bet on trends like the emergence of cloud-based business software or increased US energy production thanks to the shale-drilling boom, according to the article.

IPOs can further benefit from the perception among many investors that other assets, including bonds of all types, are fully valued following sharp rallies, the Journal said.

“With interest rates low and with good corporate-earnings growth and nowhere else to invest, risk appetite is alive and well,” said Matt Litfin, who helps oversee $4.6 billion as a portfolio manager at William Blair Funds, told the paper.

There’s also some investors who believe in the idea that the early momentum shown for successful IPOs can be sustained. In 2012, for example, IPOs provided an average return of 20% from their IPO date to year end.3

One investing alternative leveraged to that broad idea is the Recent IPOs motif, which has gained 7.3% in the past month. In that same time frame, the S&P 500 has lost 0.71%. Since the motif’s creation last November, it has risen 19.1%; the S&P 500 is up 13.6%.

Of course, as the Journal notes, many IPOs carry their share of risk. Companies often go public at an early stage, when their sales and profit outlooks aren’t certain and proven historical performance through varying market conditions is scant.

Not to mention that overall market bullishness has probably contributed to IPOs attracting a higher pricetag relative to their sales than in the past. In 2014, the Journal reported, companies have fetched a median IPO price 8.2 times their latest year’s sales, vs. a median price-to-sales ratio of 3.6 in the previous 12 years, according to data compiled by University of Florida professor Jay Ritter, who researches IPOs.

However, try telling that to investors who just had their appetite whetted by Alibaba.

1Telis Demos and Juro Osawa, “Alibaba Debut Makes a Splash,” wsj.com, Sept. 19, 2014.
2Matt Jarzemsky, “Heady US IPO Market Rolls Into Autumn,” wsj.com, Sept. 1, 2014.
32012 US IPO analysis watch http://www.pwc.com/en_US/us/transaction-services/publications/assets/pwc-2012-ipo-watch-analysis-and-trends.pdf

  1. Gaylord
    19 Oct at 5:55 am

    A big thank you for your blog post.Really thank you! Will read on…

    Reply

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