Alibaba cements reputation of big tech IPOs as portfolio dogs
SAN FRANCISCO — With Alibaba shares now trading consistently below their IPO price of $68 just over a year after their record-setting public debut, the verdict is in on the largest Internet stock offerings of this boom.
And the verdict is unanimous: Big tech IPOs have been among the dogs of your portfolio.
The largest five offerings of this technology investment cycle, in order of how much the respective offerings raised for their online firms, were Alibaba ($25 billion), Facebook ($16 billion), Twitter ($2.1 billion), Zynga ($1 billion) and Groupon ($700 million).
They include and are among the largest five tech offerings on record, along with Google’s $1.8 billion IPO in August 2004.
Other than their great size, all five issues have two other things in common. All were trading below their IPO price one year on and all lagged the returns of the Nasdaq Composite Index during their first year of trading.
And that’s putting it mildly.
To be frank, the one-year returns of Internet IPOs were pummeled, spanked and rolled over by any passive, index-based investment strategy during the time between Groupon’s offering, in November 2011, and Alibaba’s one-year anniversary, on Sept. 18. (Monday, Yahoo said it would proceed with the planned spin-off of its stake in Alibaba even though the IRS declined to rule on whether the transaction will be tax free.)
And importantly, all the companies except for Facebook are still trading below their IPO price.
The yawning gap between the extreme risks and market-lagging returns of these five issues over the course of several years raises an obvious question: Why would any intelligent retail investor ever put a single dollar of hard-earned money into the first year of a public Internet company — or invest in a mutual fund managed by someone who does?
The answers are several, including the 401k tax break and the billions in advertising spent by the financial services industry every year, and those are fodder for future columns here.
For now, if and when your broker or investment adviser asks you if you’re interested in post-IPO shares of Uber, the ride-sharing service, or Square, the mobile-payments service — arguably the two tech start-ups IPO bankers are drooling over most right now — have the chart at the bottom of this story at hand.
Each day this week, we’ll cover the story of each of these IPOs in a column.
Today: Alibaba
Tomorrow: Facebook
Wednesday: Twitter
Thursday: Zynga
Friday: Groupon
If your broker wanted to sell you Alibaba above $100 a share last autumn, in the final wash of its IPO hype, he or she must have loved it at $80 this summer.
Of course, now you can get Alibaba for $60 a share, a level it’s been flirting with for weeks.
This IPO was the largest not only in the tech industry, but the largest of by any firm anywhere.
The offering is also a textbook case of how a company’s bankers can create an unsustainable high price for a new issue: by selling just a small slice of a company and waiting for the investing public to react as though they were selling the whole kit and kaboodle.
As noted in an earlier column on analysts lowering their Alibaba earnings estimates and stock price targets, the projections for sales and profit growth Wall Street used to sell this IPO had one serious flaw.
They gave too much weight to underlying growth in the Chinese online economy and too little to the other companies Alibaba competes with for business there.
Alibaba faces stiff competition, which is going to crimp its growth and profit margins, from the likes of Tencent and JD.com.
Maybe that's why the company is trading 15% below its IPO price at the start of this week.
Alibaba's valuation is $50 billion less than the company's investment banks convinced professional portfolio managers it was one year and one week ago, during the biggest IPO on record.
The five largest tech IPOs since Google’s offering a decade ago have all lagged the returns of any index fund or ETF that tracks the Nasdaq Composite Index, and badly so:
Alibaba
IPO size: $25 billion
IPO valuation: $193 billion
IPO date: 9/18/14;
Valuation 1-yr later: $148 billion
One-year return: -30%
Nasdaq return: +7%
Facebook
IPO size: $16 billion
IPO valuation: $104 billion
IPO date: 5/17/12
Value 1-yr later: $72 billion
1-yr return: -31%
Nasdaq return: +26%
Twitter
IPO size: $2.1 billion
IPO valuation: $14.2 billion
IPO date: 11/6/13
Value 1-yr. later: $12.9 billion
1-yr return: - 9%
Nasdaq return: +20%
Zynga
IPO size: $1 billion
IPO valuation: $7 billion
IPO date: 12/15/11
Value 1-yr later: $1.8 billion
1-yr return: -74%
Nasdaq return: +19%
Groupon
IPO size: $700 million
IPO valuation: $12.5 billion
IPO date: 11/3/11
Value 1-yr later: $1.9 billion
1-yr return: -85%
Nasdaq return: +12%
Follow USA TODAY columnist John Shinal on Twitter: @johnshinal.