3 Things Investors Should Know About Alibaba

May 07, 2014

Spotlight turns again on Chinese e-commerce giant after Tuesday’s IPO filing.

Chinese e-commerce giant Alibaba filed paperwork with U.S. regulators this week, putting in motion its planned IPO in a U.S. exchange. While the filing fails to answer key questions such as where the stock will be listed, and for how much, it seems clear that Alibaba’s initial public offering will be one of the biggest in history.

Market analysts estimate Alibaba’s initial public offering could easily top the $16 billion Facebook raised when it went public in 2012, making it the biggest tech IPO ever. The company’s valuation is estimated to be more than $115 billion.

U.S. ETF investors should care about Alibaba’s IPO for three main reasons:

1. Alibaba’s footprint is massive, and yet it’s only scratched the surface.

Alibaba is the biggest e-commerce company in the world. In 2013, it sold $248 billion in goods to 231 million active users, according to the F-1 filing submitted to regulators this week. To put Alibaba’s 2013 business volume in perspective, that’s more business than Amazon and eBay combined last year, according to Reuters. That’s big business.

In a broader sense, Alibaba controls nearly 85 percent of China’s online shopping market—a quickly growing but still nascent space. In fact, online shopping represented only 7.9 percent of total China consumption in 2013, according to the filing. That rate of consumption is “projected to grow at a compound annual growth rate of 27.2 percent from 2013 to 2016,” the filing said. Alibaba dominates that space.

In the nine months ended Dec. 31, 2013, Alibaba generated revenue of $6.5 billion and net income of $2.9 billion, according to the filing.

That’s a stock most investors will want to own.

2. Alibaba’s IPO could make serious waves in the tech stock segment.

Just about everyone expects investors to flock to own a piece of Alibaba’s action, even if that means doing so at the expense of other tech stocks. Some fear that a mad dash for Alibaba shares could hurt competing tech stocks, which are already bruised this year.

Twitter, for instance, bled 18 percent of value yesterday, and is already trading 4 percent lower today, as employees cash out their stocks after a lockup period that ended Tuesday. The market is also reacting to reports that Twitter’s user growth rate is slowing down.

AOL, meanwhile, was facing a 20 percent plunge following disappointing results, according to MarketWatch. And Yahoo stocks have now bled about 7.8 percent year-to-date, with the latest round of pressure stemming from Alibaba’s filing.

Yahoo owns 24 percent of Alibaba—a stake it bought back in 2005. In the F-1 filing, Alibaba estimated its valuation around $110 billion—below market estimates that range anywhere from $115 billion to $200 billion.

For U.S. ETF investors who own funds that that offer exposure to this segment, such as the $13 billion Technology Select SPDR (XLK | A-78), the $129 million Global X Social Media ETF (SOCL | B-22) or even the nearly $2 billion First Trust Dow Jones Internet ETF (FDN | A-97), it’s already been a challenging ride so far in 2014. Alibaba’s IPO promises to stir up more volatility—and dispersion in returns—in the space ahead.

XLK_SOCL_FDN_YTD_Performance

Chart courtesy of StockCharts.com

 

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