Alibaba IPO: Pressure on Amazon and eBay by Virendra Singh Chauhan, Financial analyst with Amigobulls

Summary

  • Alibaba Group Holding Ltd (NYSE:BABA) is set to IPO this week (Friday), with a final IPO price fixed at $68 per share.
  • Institutional investors buying into the Alibaba IPO could put pressure on other e-commerce names like Amazon and eBay.
  • Post IPO Alibaba will continue to be the stock of choice for investors looking for exposure to e-commerce sector due to the superior growth and higher profit margins.

Alibaba IPO: Pressure on AMZN and EBAY stocks

This week will witness one of the biggest IPO’s in the history of the world. Alibaba Group Holding Ltd (NYSE:BABA) will list its shares on the NYSE in an IPO many believe could be valued at close to $200 billion and raising close to $21-$24 billion in IPO money. We take a look at the impacts of Alibaba IPO on the equity markets in general and specifically on some e-commerce stocks.

Alibaba IPO
Alibaba IPO

The huge sum of Alibaba is attempting to raise could be the highest IPO funding in the history of the United States or even the world. However, to raise such a huge sum of money, it is the institutional investors who need to buy the stock in great numbers. This is precisely where Alibaba IPO effect could ripple across the broader equity markets. However, more specifically it will have a greater impact on e-commerce stocks.

Alibaba IPO – Fund managers will reallocate Ecommerce sector exposure

Most fund managers have a certain level of exposure which they like to maintain with regard to every sector. While Alibaba is not a pure play e-commerce service provider, it broadly is looked at as an e-commerce entity listing on the NYSE. Therefore, to get a pie of the Alibaba IPO, fund managers will reallocate their e-commerce sector holdings in order to get in on the action while also keeping their sector exposure unchanged. Hence, the most likely names to be sold off by the large funds will be e-commerce stocks like Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY).

Alibaba IPO – Amazon and eBay share of Fund managers holdings

According to information on Yahoo Finance, the current institutional holdings of Amazon and eBay are as given in the table below.

% of shares held by Institutional investors Market Cap ($ in billions) Value with Institutional shareholders ($ in billions)
Amazon 68% 149.7 101.80
eBay 84% 64.48 54.16
Overstock 47% 0.438 0.21
Total 214.62 156.16

Source: Yahoo Finance

The total institutional holding in e-commerce stocks was largely concentrated in Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) due to the following reasons:

  • Fund managers looking for a growth exposure in the E-commerce sector had a clear growth stock in Amazon with very little competition when it came to topline growth.
  • Money managers seeking a cushion of profitability would have invested in eBay which has found a balance of sorts between slightly lower topline growth and a stable bottom line.

The total institutional funds parked in the stocks of Amazon, eBay and Overstock comes in at $156.16 billion.

According to a post on cnbc.com, Michael Cohn, chief market strategist at Atlantis Asset management figures the retail side that he represents may be able to get a 25 percent to 30 percent fill on their orders, but that probably will be the limit.

Assuming that retail investors do get 30% allocation in the IPO, Institutional investors will still contribute $15.75 billion of the $22.5 Billion (average of $21 billion to $24 Billion) funds Alibaba Group Holding Ltd (NYSE:BABA) could raise in the IPO. That makes up close to 10% of the total exposure institutional currently have to the three e-commerce companies. The drag on prices, of such huge sell-offs could be simply tremendous in the lead up to the Alibaba IPO.

BABA will continue to be the e-commerce stock of choice post IPO

Alibaba will continue to be the first choice of investors looking for exposure to the e-commerce sector due to its higher growth and hugely profitable operations. A comparison of the TTM performance with that of Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) drives this point home.

Alibaba eBay Amazon
LTM revenue growth 49.3% 13.5% 22.3%
LTM Operating profit margin 45.8% 20.5% 0.8%
LTM Free cash flow margin 63.96% 27.3% 1.3%
LTM P/E 41.53** 23.13* 852.63
LTM P/S 17.90** 3.83 1.83

*eBay PE adjusted for One time gain **Alibaba Valuation multiples based on IPO price of $68

It is clear from the above table that Alibaba Group Holding Ltd (NYSE:BABA) has outperformed both Amazon and eBay on the measures of topline growth, profit margins as well as free cash flow margins. In earlier posts on Amigobulls, we had covered as to why Alibaba will continue to outperform Amazon fuelled by favorable dynamics in the Chinese e-commerce market.

In conclusion, it could be a while before institutional investors reallocate their E-commerce exposure. They will be wise not to dump significantly large holdings in the one market as this could hurt them too. Therefore, the price pressure on Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) stock could continue to pile up even post the IPO as large institutional holders look to exit their current stakes in order to get a share in the high growth and high profit operations of Alibaba. Moreover, following the IPO, Alibaba will continue to be the value stock in the e-commerce space, given its solid growth and high margins. It could well be the winning stock investors have for long been searching in the e-commerce space.