Garage sale on cards as fund managers make room for Alibaba

With fund managers champing at the bit for e-commerce giant's IPO, stocks seen as lesser lights, like Amazon, may be ditched from portfolios

PUBLISHED : Wednesday, 27 August, 2014, 10:24am
UPDATED : Thursday, 28 August, 2014, 4:19am

Investors are looking over portfolios to make room for Chinese e-commerce giant Alibaba's market debut likely next month - and that means some less attractive stocks that funds are holding might be shown the door.

The initial public offering, which could top US$16 billion to become the largest initial public offering by a technology company, is expected as early as next month after Alibaba management begins a two-week investor road show after Monday's Labour Day holiday in the United States.

As investors take a hard look at their portfolios, it may trigger a garage sale of names that are failing to impress Wall Street, including US e-commerce rival Amazon, fund managers said.

"Any company that didn't meet expectations and give a rosy outlook is probably being considered as a sale candidate to make room for a name like this," said Jim O'Donnell, chief investment officer of Forward Securities, which has US$5 billion in assets under management.

"There won't be wholesale turnovers of portfolios, but I imagine Amazon is being looked at."

Chinese rivals like Baidu and Tencent also may be pressured as well if fund managers view Alibaba, which powers 80 per cent of all online commerce on the mainland, as a better path to tap into growth in the world's second-largest economy.

Next month's roadshow is likely to attract interest from a wide range of funds, including those focused on emerging markets and technology. Alibaba may garner a valuation of US$200 billion or more when it goes public, analysts say, which would make it one of the 20 biggest companies listed in US markets.

"[Alibaba] is the 8,000-pound gorilla coming for the stock market," said Michael Reynal, portfolio manager at San Francisco-based RS Investments.

Just how investors act also depends on whether they gain a toehold in the highly anticipated IPO at all. One topic of debate is how investors who are boxed out will play Yahoo, which holds a 22.5 per cent stake in Alibaba.

The US web portal has struggled to reinvent its core business, but has nonetheless seen its shares more than double in the past two years on the strength of its Alibaba ties.

Some investors say Yahoo could be sold to clear room for Alibaba. By some measures, the company carries a high valuation, with its enterprise value to sales ratio surpassing 90 per cent of the US stock market, according to Starmine.

On the flip side, investors kept out of Alibaba's IPO could snap up Yahoo to capitalise on the Chinese company's growth. That argument could also help buoy shares in SoftBank, which has a 34 per cent stake in Alibaba.

"A lot of people know they're not going to get IPO shares, so they hold Yahoo and Softbank," said Mark Yusko, the chief investment officer of Morgan Creek Capital Management, which has invested in Alibaba through private placements. "They want to capture the IPO pop."

Alibaba's debut comes at a time of growing dissatisfaction on Wall Street over Amazon's record of thin profits and heavy spending on developing television shows and hardware initiatives including aerial drones and smartphones.

Amazon shares have fallen about 17 per cent so far this year, while shares in rival eBay, which also could be sold in favour of Alibaba, have been flat as the technology-heavy Nasdaq has risen almost 9 per cent.

Amazon's operating margin over the past 12 months is about 0.8 per cent while eBay's is roughly 20 per cent. By contrast, Alibaba boasted a 47.5 per cent operating margin in the fiscal year that ended in March, according to its IPO filing.

Still, some analysts say Amazon is not easily replaced by Alibaba because of their relative geographic strengths.

"Amazon has a stranglehold on the US market just as Alibaba has a stranglehold on the Chinese market," said Daniel Kurnos, an analyst at Benchmark. "It will be hard for one to penetrate the other."

Last year, Alibaba handled more online transactions than Amazon and eBay and had 231 million active buyers, or the equivalent of 17 per cent of China's population.

By 2020, online retail sales on the mainland are estimated to reach US$420 billion to US$650 billion, as much as the US, Japanese, British, German and French markets combined, according to a recent analysis by McKinsey Global Institute.