As Alibaba (BABA) declines on its second full day of post-IPO trading in a broader falling market that might signal a large correction due to macroeconomic matters, the bears are coming out of the woods. They are gleefully gloating that BABA’s earliest investors are bag holders who have bought into a shady business, or into declining Chinese growth, or into an overpriced offering that is investment banks’ opportunity to rip off retail investors. Are they right?
If retail investors panic and sell today, or if it keeps falling and they sell at a bigger loss over the next few days, the answer is indisputably “yes.” But what if they control their panic and hold—will their losses disappear and turn into gains?
The best way to answer that question is to dig into the company’s F-1 filing and do some research on what the company is, what it does, how it will grow in the future, and how that will impact the company’s valuation. Few bears (or bulls for that matter) will bother to do all of that, because it’s hard work. Wise investors will, and they will outperform, whether they decide to buy, hold, or sell the stock.
To consider how BABA’s stock will perform in the future, let’s take a look at other recent comparable IPOs and how they’ve performed. Let’s see how accurate the view “IPOs are for suckers” are, and how much an IPO investor has under or outperformed the market by betting on big, emerging tech stocks.
Facebook’s U
With its unstoppable performance in late 2013 and 2014, Facebook (FB) has become a tech darling for retail and institutional investors alike. Bearish sentiment is hard to come by for the social media juggernaut, but back in 2012 the attitude was very, very different. Then, bears dismissed the stock for two reasons. First, it hadn’t monetized mobile, which was such a big deal at the time that early shareholders planned a lawsuit against Facebook’s underwriters. Secondly, the company seemed disorganized and unfocused, with no strategy on improving its monetization road map despite a super-high P/E ratio.
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In the first days of trading, Facebook plummeted, losing half of its post-IPO price in three months. While it began to recover at the end of the year, that recovery was lackluster and little consolation for those who bought at 38, a seemingly impossible price point in early 2013.
The panic that IPO buyers felt, combined with the immense glee from the popular financial media about this company’s failed offering, characterized the financial world in late 2012. Arguably part of the trend towards indexing and massive capital flows to Vanguard’s index funds was motivated by this failed IPO. The sense that Wall Street was a rigged casino was strong in 2009 and 2010 for obvious reasons; the flat performance in 2011 didn’t help things at all, and FB’s flop was more fuel to the fire.
Since then, things have been different to say the least. FB has doubled in price since its first day of trading, yielding a CAGR of about 35%. The super confident who bought on dips did much better. Even without that, traders who bought in at the first-day highs have earned returns double that of the S&P 500 (SPY), which has risen about 53% over the same time period compared to FB’s 100%+.
Twitter’s S-Curve
Twitter (TWTR) is trading in the 50s these days, up from a low of 30 just a few months ago. Since its IPO late last year, Twitter has experienced a classic S-curve that says a great deal about Goldman Sachs (GS) as an underwriter, and their efforts as a market maker to ensure this stock’s IPO outperformed Facebook (FB):
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The market makers can’t keep a stock up forever, so TWTR was hit hard in the big tech correction of early 2014, when all momentum stocks and big tech stocks in particular faced a sharp decline. The bearish sentiment around this stock in May is hard to remember, despite it being just a few short months ago; back then, belief that user growth was poor and the quality of existing Twitter accounts was worse kept a lot of investors on the sidelines. Twitter even began evangelizing its platform to get more people on board.
Partly because of the World Cup and partly because of low expectations, the stock popped on its earnings announcement in July, and has been in a clear bullish channel since then. Its S-curve shape is fully formed, and people who bought on the first day of trading in the mid-40s have enjoyed a 13% return in less than a year.
Baidu’s Slipping Knife
In 2005, Baidu (BIDU) IPO’d into a hot stock market and at the height of the U.S. housing boom that was making Americans feeling richer and more eager to invest in stocks. While the dot-com bust was a recent memory, GOOG’s strong performance was happening in real time, suggesting that search might be a new opportunity for equity investors.
Demand for the BIDU IPO was strong, but its initial pop set a high bar that the stock could not meet for years. The stock would not hit its first-day high until the middle of 2007, nearly two years after the debut.
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Its first days of trading were a moment of extreme panic for investors; those who bought at the top on the first trading day saw a 25% loss within a week. Volumes collapsed as prices seemed to hit their stride in the high-single digits. Anyone who allowed panic to overcome their investment strategy would have locked in losses as high as 50%.
Since then, things have changed a lot for BIDU. After hitting a clear bullish trend in 2007, the stock saw a minor correction in the 2008-2009 crash, but then soared shortly after that as Chinese search exploded at the same time. Today, anyone who held from August 2005 would see a CAGR of 34.52% over 9 years, including 2008. That’s much better than the 5.4% CAGR for the same period that the Hang Seng Index returned.