Alibaba IPO: 3 Potential Ripple Effects on Stocks

The butterfly effect is operational in the stock market and investment world although it might be called by different names and terms. Irrespective of whether you call it the butterfly effect, the ripple effect, or cause-action effect, the fact remains that there isn’t such a thing as coincidence in the stock market. One thing invariably leads to another and investors need to be on the lookout for the potential butterfly effects on the horizon.

A Long-Awaited IPO

In February, I wrote a post titled “2014: Year of Headline-Grabbing IPOs” in which I mentioned the buzz about Alibaba’s IPO. Alibaba is the largest internet company in China and it operates the largest internet market in the world. Yahoo has a 24% stake in Alibaba and the eyes of tech world are fixed on how Alibaba’s IPO works out.

The rumor is now substantiated as Alibaba filed for an IPO earlier this week and it was reported that Alibaba Group has filed for a nominal $ 1 billion initial public offering. Alibaba’s IPO has the potential to cause a ripple effect in the market because of the perceived size of its valuation. The consensus analysts valuation pegs Alibaba’s valuation somewhere above $100 billion and a $150 billion valuation point will not be perceived as reckless.

Ripple Effect #1: Reward for Early Backers

One of the potential ripple effects in Alibaba IPO is that the IPO could reward early backers significantly. Early backers of Alibaba such as Yahoo have been recording positive buzz and it stands to gain more after the IPO. Jack Ma, Lead Founder and Executive Chairman of Alibaba will also move up from his number 8 position on China’s rich list because of his 7% stake in Alibaba. Hence, it is evident that some people stand the make significant gains with the Alibaba IPO.

Ripple Effect #2: A Potential Selloff in Growth Stocks

The second ripple effect is that Alibaba IPO could cause a selloff in low momentum growth stocks. Alibaba is widely profitable and investors will be lining up to buy its stock. However, investors cannot pull cash out of thin air to invest in Alibaba and so they have to pull out of some low growth investments and put their money where it has a better chance of yielding an increased ROI.

Hence, we can expect to see a selloff in the stocks of companies such asFacebookTwitter, and Netflix among others when investors move to the next big thing. Alibaba’s $150 billion valuation is practically equal to the combined loss in market cap of tech stocks such as Facebook , Twitter and Netflix that have been trading down over the last couple of days.

Ripple Effect #3: Tech Stocks Might be Burned

The third ripple effect is that things could get very messy after Alibaba IPO. You will have an idea of what I mean if you remember the debacle that followed Facebook’s botched IPO. I am not comparing Alibaba IPO to the botched Facebook IPO and I am not predicting that Alibaba will mess up just like Facebook did. What I am saying is that the market could be in a precarious position if (and only if) the Alibaba IPO did not go as expected.

For one, Yahoo is bound by agreement to sell some 40% of its 22.6% stake in Alibaba after the IPO. Even though, it is still early to estimate how much that 40% will be worth when Yahoo sells, we can project that it adds a significant boost to Yahoo’s current $34.29 billion market cap. However, the issue is not Yahoo’s sale of its stake but the timing of that sale. More so, a Reuter’s piece via Yahoo Finance piece details some red flags that might cause the Alibaba flight to experience turbulence after its IPO.

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