Saturday, September 20, 2014

The Alibaba Craze and my Two Cents on IPOs

Quick Note: Some of you reading may already be seasoned investors and the first few paragraphs on this post may be too basic. If so, feel free to simply skip to the end and read my thoughts on how I feel about IPOs and specifically Alibaba. Please bare with me as one of my missions for the blog is to educate those individuals that still have limited investing knowledge but are looking to educate themselves. Thank you for your ongoing support.

Hey All!

Happy Saturday. Nice day here so far in NYC. Excited because fall is coming and guess what my favorite season is?!

Well anyways, feeding from the momentum that went on in Wall Street yesterday after "the biggest IPO in history"-- Alibaba (Ticker symbol: BABA) I figured this would be the perfect time to write a quick post on:

1. What exactly is an IPO
2. What the heck is Alibaba
3. My thoughts on buying stocks on the day they become publicly traded (also known as IPOs).

Lets jump right in.

1. What exactly is an IPO:

In a nutshell-- when a company goes from private (having only a few owners or shareholders, usually the founders) to publicly traded (where they make the decision to allow the public to own shares of the company as well for the very first time)-- this is called an Initial Public Offering (or IPO).

A company usually decides to allow an IPO with the purpose of collecting funds from the public in order to have additional money to grow the corporation and take it to a new level. The company may have plans of expansion or projects that that they feel would significantly increase the value of the service or product offered. Hence, all the money collected through this initial offering (and beyond) is used to invest in the company for growth, among other business activities.

When a company is private; they are not required to disburse any financial information to the public or explain anything regarding future projects or plans. However, when a company is public it is now required by law to disburse pretty much all company related information to everyone-- that includes you and me. From all financial statements to plans regarding change of management, plans for growth, and everything in between has to be communicated to the public. Hence, the tradeoff pretty much comes down to exchanging privacy for funds.

2. What the heck is Alibaba:

Ever heard of Ebay or Amazon? If so, Alibaba is not only the Ebay and Amazon of China combined but apparently is much more than that. According to a Wall Street Journal article which you can read here the company is currently the largest ecommerce platform in the world with millions of users and income of over $248 billion last year alone. As you may be aware, sites such as amazon, ebay, or even Google are blocked in china. Hence, this company not only targets that population that is unable to benefit from the ecommerce in the US but since is an online company, pretty much the entire world can purchase products from there. As per Wikipedia, there are currently 1,366,690,000 people living in china alone. The amount of market share this company can possibly grab is enormous.

3. My thoughts on buying IPOs:

When a company first becomes publicly traded there is usually a whole lot of excitement and hype around it. This is not necessarily a good thing (at least not initially). Hence, my advice regarding IPOs is never buy on the first day in which a company becomes public. The company may in fact be amazing. It could be the next Google or the next Berkshire Hathaway. However, when you buy stocks on the first day, you'll usually be at a disadvantage and will likely be paying a lot more than you need to. This is mainly due to the fact that there will be no tangible basis for the high price other than the fact that there is so much hype around the stock. This means that the second the hype dies down, so will the price. Hence, wait it out.

The price of Alibaba went all the way to $99 on the first day of trading and as I type this it is now at $93.30. Not to mention that the company opened trading to preferred investors (those with the permission to buy shares before the general public) at $68. Usually when a company is touring the country giving stock pitches to high net worth individuals and funds; they also allow these companies the chance to have first dibs at purchasing when the stock first comes out. Hence, this usually drives up the price almost immediately. Although the initial price for BABA was set at $68; by the time the average investor could get shares, the stock was already trading at $89.95. 

One thing that stands out in my mind from my finance courses in graduate school is that if someone ever offers you the chance to buy those "initial shares" before they get to the general public you should run-- and run fast! If  high wealth individuals and/or funds  with very deep pockets don't want those shares in the first place, you should probably come to the conclusion that there is something fishy going on and/or that the company is simply a flop and if those billionaires don't want shares, why should you? So

So, how long should you wait before investing in new IPOs? This is not an exact science and  is entirely up to you. I would recommend watching the stock price on the very first day and continue to monitor it. Once you notice the conversation around the stock sliding down a bit, take another look and make a decision on whether you still want to buy. At least by waiting, you'll know you'll be paying a more reasonable price. I don't know about you but if I can get a great stock "on sale" rather than at "full retail price" I prefer the former.

Would I be buying? Not anytime soon. I will be waiting it out and look forward to learning more about this company as the days go on. I am not fully educated about everything Alibaba has to offer so, I will be on the side line for now.

Thanks for reading! Any questions or comments? email me or comment below. Have a great Saturday, and cheers to profits.