SAN FRANCISCO/NEW YORK
(Reuters) - Investors are looking over portfolios to
make room for Chinese e-commerce giant Alibaba Group
Holdings Inc's market debut 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 $16 billion to become
the largest-ever IPO by a technology company, is expected as early
as next month after Alibaba management kicks off a two-week investor
road show after the Labor Day weekend.
As investors take a hard look at their portfolios, it may trigger a
veritable garage sale of names that are failing to impress Wall
Street, including U.S. e-commerce rival Amazon.com Inc, 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, which has $5 billion in assets under management.
"There won't be wholesale turnovers of portfolios, but I imagine
Amazon is being looked at," he added.
Chinese rivals like Baidu Inc and Tencent Holdings Ltd also may be
pressured if fund managers view Alibaba, which powers 80 percent of
all online commerce in China, 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 $200 billion or more
when it goes public, analysts say, which would make it one of the 20
biggest companies listed in U.S. markets.
"It is the 8,000-pound gorilla coming for the stock market," Michael
Reynal, portfolio manager at San Francisco-based RS Investments,
said of Alibaba.
YAHOO ARBITRAGE
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 of the IPO will play Yahoo Inc, which holds a 22.5
percent stake in Alibaba.
The U.S. web portal has struggled to reinvent its core business, but
has nonetheless seen its shares more than double in the last two
years on the strength of its Alibaba ties. Some investors say Yahoo
Inc 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 percent of the U.S. stock market, according to
Starmine, a Thomson Reuters company.
On the flip side, investors boxed out of Alibaba's IPO could snap up
Yahoo to capitalize on the Chinese company's growth. That argument
could also help buoy shares in Softbank Corp, which has a 34 percent
stake in Alibaba.
"I bet a lot of people are playing Yahoo for Alibaba and once the
IPO is gone, they may exit Yahoo completely," said Paul Meeks,
senior analyst and portfolio manager of the $42 million Sextant
Growth Fund at Saturna Capital, which has $4 billion assets under
management.
"A lot of people know they're not going to get IPO shares, so they
hold Yahoo and Softbank," said Mark Yusko, who manages $4.5 billion
as CIO of Morgan Creek Capital Management and 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 for Amazon's record of thin profits and heavy spending on
developing television shows and hardware initiatives including
aerial drones and smart phones.
The expected boom in e-commerce in China may also drive some
U.S.-based investors in Chinese search company Baidu toward Alibaba.
More than 60 funds hold Amazon, Yahoo and Baidu shares, according to
Lipper, a Thomson Reuters company, about 20 of which are target-date
funds from Wells Fargo and AllianceBernstein, designed to favor more
conservative investments as an investor's retirement approaches.
Amazon shares have fallen about 17 percent so far this year, while
shares in rival eBay Inc, which also could be sold in favor of the
Chinese e-commerce company, has been flat as the tech-heavy Nasdaq
has risen almost 9 percent.
Amazon's operating margin over the last 12 months is about 0.8
percent while for eBay, margins are roughly 20 percent, according to
Thomson Reuters data. By contrast, Alibaba boasted a 47.5 percent
operating margin in fiscal year 2014, ending 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 U.S. market just as Alibaba has a
stranglehold on the Chinese market," said Daniel Kurnos, analyst at
Benchmark Co. "It will be hard for one to penetrate the other."
In 2013, Alibaba handled more online transactions than Amazon and
eBay Inc and had 231 million active buyers, or the equivalent of 17
percent of China's population.
By 2020, online retail sales in China are estimated to reach $420
billion to $650 billion, as much as the United States, Japanese, UK,
German and French markets combined, according to a recent analysis
by McKinsey Global Institute.
(Reporting by Deepa Seetharaman in San Francisco and Ryan Vlastelica
in New York; Editing by Sonya Hepinstall)
