Why Alibaba 2.0 May Soar in Year of Failed IPOs

Amid a year of hot new tech IPOs, Chinese e-commerce giant Alibaba Group Holdings (BABA) is considering a secondary offering with a first-time share sale in Hong Kong in hopes of raising close to $20 billion. But the company is also hoping to avoid the fate experienced by some recent high-profile IPOs like Uber and Lyft, whose shares have fallen 10% and 20% respectively from their initial offering prices. Alibaba has at least two things in its favour, according to Bloomberg: it’s a highly profitable business, and its stock has a strong track record of returns for investors. 

With a host of other tech companies including Postmates Inc., Slack Technologies Inc. and WeWork Cos. planning to go public in 2019, Alibaba will face plenty of competition for investors’ cash. The company will also have to overcome some of the negative sentiment that has likely built up from the poor performance of tech IPO deals over the past year, which have lost investors 13% on average. Another worry will be whether or not Hong Kong will have enough liquidity and after-market performance. 

Alibaba’s core business of charging commission on items sold on its platform and selling advertising on those same platforms is highly profitable. “Alibaba is profitable and has a great cash flow—its growth has been stellar,” Hao Hong, Bocom International Holdings Co.’s chief strategist, told Bloomberg. “People wouldn’t perceive this kind of deal negatively.” 

In addition to having a profitable business, shares of Alibaba have more than doubled since first trading in New York in 2014 compared with about a 40% gain in the S&P 500 over the same period. The company is currently valued at around $387 billion. The e-commerce giant hopes that its past record will provide investors ample incentive to buy shares in its planned secondary offering.  

Despite that longer-term performance, more recently the stock has been falling and is down close to 20% since the beginning of July 2018, the month when the U.S. first slapped tariffs on Chinese imports to spark a trade war that has intensified in recent months. 

Indeed, Alibaba’s choice to have its secondary offering listed on the Hong Kong Exchange may be political posturing as the company tries to gain favor with Beijing amid the recent trade tensions. The direction the trade war takes may have serious implications for Alibaba’s intentions to expand beyond its domestic Chinese market, a consideration investors won’t want to ignore.