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Alibaba, Hype, IPO’s

Is Alibaba’s IPO fueled by a bunch of hype or will the stock take off?

Trading stocks in hot new issues can offer huge opportunities so I’m sure you’ve heard and felt the excitement pour out on the news of the week: Alibaba’s IPO. The Chinese’s answer to Amazon.com is about to go public and not since Facebook launch its initial public offering has their been this much enthusiasm for an IPO. Plenty of people are talking it up and I’m sure the investments banks that are handling the offering are ginning up the company as the next greatest thing for tomorrow’s future stock market millionaires. But, is Alibaba going to emerge as the next international powerhouse or is just a bunch of hype?

Background of the Crocodile

Looking at the company’s background and history, it really can’t be considered anything but a massive success story.  The company was created by a former school teacher, Jack Ma, in the People’s Republic of China which has gone on to capture most of the Chinese internet ecommerce market share and has slowly spread its reach beyond its borders.  Its overcome everything from government bureaucracy to head-on competition from Ebay but through the years has been steadily marching forward to fulfill Ma’s vision of an internet super-power to challenge Amazon.com’s standing in ecommerce.

Alibaba may give Amazon a run for its money but if history shows traders and investors anything, it shows that IPO’s rarely live up to their hype.

Does that mean that the company may not emerge as the ecommerce dragon that everyone thinks it might one day? Maybe, maybe not.

 

IPO’s Poor Performance History

The better question is when or when not to trade? Facebook was touted as one of the top IPO’s in recent history and it was. But, it was not the “be all, end all” stock performances in recent history. Truth be told, in the beginning of its early trading day, you could make the argument that it was a flop. The stock started off well but then gravity took over and hype gave way as the stock began to decline and then accelerate like a skydiver who forgot his parachute.

Facebook re-grouped, found support and began trading higher but that took several weeks to months for the stock to find its footing and began it slow ascent back to bullish territory.

And, that is usually the case with IPO’s where they launch amid fanfare and fireworks followed by fizzle as the stock overwhelming underperforms. It takes awhile to sit back and watch who the winners will be among a sea of launched IPO’s. Like baby sea turtles, IPO’s are hatched and frantically try to crawl to bullish territory only to be snatched by predatory bears. As a result, many are called but few survive.

So, knowing the odds are against you, what do you do?

How To Play It

In my opinion and experience, its better to wait and see if Alibaba makes the cut. If it does, then in a few weeks to a couple of months, you’ll see the stock begin to make a steady series of higher highs and higher lows in its price action and trading stocks to the upside is a no-brainer.

But, if the stock craters, you’ll be on the sidelines waiting to short the stock or go long put options if they’re available.

If you’re a believer in the company, and options are available, sell the put options and collect the premium. If the stock trades higher, you’ve made some low-risk option income but if not then you’ll buy the stock at a discount after having your cost-basis lowered by the premium you collected from the sold put options.