As Shake Shack's recent slide demonstrates, while the IPO boom gives you lots of hot companies to take a flier on, you’ll most likely fall flat.
Do you regret missing out on the stunning debuts of Alibaba ALIBABA GROUP HOLDING LTD BABA -0.71% and Shake Shack SHAKE SHACK INC SHAK 6.93% ? Are you now waiting to hail Uber or snap up Snapchat when they go public, as expected?
Before you jump in, remember that when you pick a stock, you’re already taking a leap of faith—but with a newly public company, you’re taking two leaps. First, do you really know enough about the business? Second, has the market had sufficient time to draw its own conclusions so that you are buying at a fairly rational price?
“Anything that’s been trading for a while has been vetted by a whole host of investors,” says John Barr, a manager with the Needham Funds. Not so at or just after an initial public offering, and that’s why you have to tread carefully.
You’ll pay for the honeymoon
IPOs attract big headlines on day one, but surprises inevitably crop up. From 1970 to 2012, the typical IPO gained just 0.7% in its second six months, after the honeymoon effect had a chance to wear off. That’s five percentage points less than other similar-size stocks, finds Jay Ritter, a finance professor at the University of Florida. The year after that, the average IPO lagged by eight points.
Chinese e-tailer Alibaba, which soared 38% on its first day in September, is getting its dose of reality a bit ahead of schedule. Shares are down 28% lately, after the company surprisingly missed revenue-growth forecasts.
Themes get overdone
It’s easy to be lured by a story. Shake Shack doubled on its first day, thanks to the buzz surrounding high-quality fast-food chains like Chipotle CHIPOTLE MEXICAN GRILL INC. CMG -0.07% . But riding a food trend is hard. A decade ago, overexpansion killed investors’ ravenous appetite for Krispy Kreme doughnuts KRISPY KREME KKD 0.44% , and the company’s shares remain 56% off their peak.
Shake Shack has also entered a crowded battle for foodie dollars: the Habit Restaurants HABIT RESTAURANTS HABT 12.48% , Potbelly POTBELLY CORP COM USD0.01 PBPB 0.27% , and Noodles & Co. NOODLES & CO COM USD0.01 CL'A' NDLS -2.74% all went public recently, and all more than doubled in the first day. Odds are the market is overoptimistic about most of them. Since 2013, 15 stocks have doubled on day one; only two—both biotech firms—are trading above their first day’s close.
The fact is, unless you gain access to an IPO at a great price at issuance, you can’t view those stocks as buy-and-hold investments. And you should avoid any richly priced new stock altogether.
Shake Shack trades at 650 times its earnings. To justify that valuation, Ritter figures the burger chain must grow from 63 stores to nearly 700, each half as profitable as a Chipotle restaurant. That’s a big leap indeed, given that Shake Shack locations aren’t even a third as profitable at the moment.
This story was originally published in the April issue of MONEY magazine. Subscribe here.
Watch Alibaba drones deliver tea to Chinese customers+ READ ARTICLE
Chinese mega e-tailer Alibaba is testing the use of delivery drones to deliver shipments to hundreds of customers in Beijing and other cities, Bloomberg reports. The technology is demonstrated in Alibaba’s video above.
Amazon has long said it wants to experiment with similar drone deliveries here in the United States. However, it has yet to receive federal regulators’ blessings to do so. While advocates of small drones say they could boost innovation across fields from delivery to agriculture, some are concerned that having too many drones zipping around the skies could pose a safety risk.
But it might be an excuse for China’s largest e-commerce company to clean itself up, for regulators but more importantly, Wall Street+ READ ARTICLE
During Alibaba’s earnings call this morning, when it reported revenues that missed expectations, only one question came up about the report released yesterday by a Chinese regulator criticizing the e-commerce giant. But that might understate how likely the report is to influence talk about Alibaba for some time.
The regulator, the State Administration For Industry And Commerce (SAIC) accused Alibaba of selling fake goods and misleading customers on its biggest shopping platform Taobao.com.
SAIC has already taken down the report, but in it Alibaba’s consumer-to-consumer platform Taobao ranked worse for fakes and reliability than other Chinese sites like JD.com and Yihaodian.com. One fair reason for that, from Alibaba’s perspective, is that Taobao is much bigger than its rivals, with 500 million consumer accounts. But the report also includes allegations that Alibaba employees accepted bribes from merchants who wanted to improve their search rankings. Those allegations are going to be riling Wall Street for a while.
Taobao’s history of fakes and ripoffs is well known in China. But that hasn’t hurt Alibaba because increasingly, shoppers look to comments sections first while scanning similar products. If the seller isn’t well reviewed, they simply move on, similar to the way a low feedback score on eBay.com can doom a seller.
In that way, it’s tough to understand the timing of SAIC’s report, which was held until after the firm’s September IPO, the government said. Even if Alibaba isn’t pushing forward with solutions fast enough for regulators’ liking, CEO Jack Ma and Co. would certainly move fast if customers were turned off. But that’s the thing: customers are only growing. In today’s earnings report, Alibaba said revenues in the quarter grew by 40%, even if they slightly missed estimates.
As Paul Mozur of the New York Times notes, Alibaba’s success has brought it greater scrutiny “with China’s opaque and at-times arbitrary government regulators, a reminder that an investment in Alibaba brings inevitable political risk.”
Fortune highlighted those regulators in a piece last yearabout the scrutiny Western companies have come under. In it, foreign business groups accused China’s regulators of having a spotty record of openness and fairness. Now Alibaba has joined the criticism. On Taobao.com, it said the SAIC’s main investigator, Director Liu Hongliang, had unfairly formed the report, including the tiny sample size used (92 batches of products).
“We felt we were unfairly attacked by a report that was a sample check of some of the items,” Alibaba vice chairman Joe Tsai said in an interview this morning on CBNC. “We thought the methodology was flawed, we felt the attack was targeted at us specifically, and it was unfair. Over time we hope to work with regulators to address the issues of their concern.”
One response to the SAIC on Taobao, by an unsigned employee, included a fair point. As translated by the WSJ:
SAIC has “succeeded in proving just how unsafe and unreliable online shopping in China is, just how crafty the several millions of online retailers are, just how blind and stupid its 500 million consumers are….”
Deal would let the Internet portal cash in on its stake while paying minimal taxes
Yahoo plans to spin-off its multi-billion dollar stake in Chinese e-commerce giant Alibaba into a separate company in an effort to cash in on its investment in the company tax-free.
The proposed transaction, which Mayer released today in conjunction with Yahoo’s fourth quarter earnings, will create an independent company called SpinCo. This publicly traded entity will absorb all of Yahoo’s 384 million Alibaba shares, worth $40 billion. Those shares will then be distributed to Yahoo’s investors.
The move comes amid pressure on Yahoo by activist shareholder Starboard Value to sell the Alibaba stake while paying minimal taxes.
When Alibaba went public last September, it marked the largest IPO of all time. Yahoo sold $9.4 billion worth of Alibaba shares in the IPO. Since then, Yahoo shareholders have argued that the company’s stake in Alibaba is worth more than Yahoo itself.
Since taking the CEO job over two years ago, Marissa Mayer has coasted on Yahoo’s fortuitous early investment in Alibaba. The company has returned $9.7 billion in proceeds from that investment through share repurchases. After this spin-off, that figure will total $50 billion. “This level of capital return is historic, especially for a company of our size,” Mayer said in a statement.
In the release, she touted the expertise of Yahoo’s tax lawyers in executing the complex transaction.
SpinCo will own a 15.4% stake in Alibaba.
Last year was a busy one for public offerings, even without Alibaba’s record-breaking listing
A company looking to raise money in 2014 didn’t have to look too far. Last year was the busiest for initial public offerings since 2010.
From Alibaba Group’s $25 billion IPO to much-hyped smaller listings, such as GoPro and Ally Financial, companies listing on the stock markets raised $249 billion worldwide, according to data collected by Thompson Reuters. Even without Alibaba’s record-breaking offering, last year was a standout period for IPOs.
IPOs picked up pace from 2013: about 40% more companies listed on public markets in 2014 compared to the year prior. They also raised more money. Leaving out Alibaba’s offering, which many agree is a once-in-a-generation kind of IPO, companies raised almost 36% more money year-over-year, according to the New York Times.
The booming market has led some analysts to speculate that it is inflated past realistic valuations, pumped up by overly optimistic investors. For instance, Lending Club’s December IPO valued the online lender at 35 times estimated revenue for 2017, which would put it on par with tech companies such as Facebook.
The public markets weren’t the only place to raise big bucks. The private market also saw big number sums, including Uber’s $1.8 billion fundraising round that valued it at $40 billion. Chinese smart phone maker Xiaomi and online home rental service Airbnb also raised huge sums that valued the startups at $10 billion or more.
Fundraising in both the public and private markets have been driven by a confluence of factors, including low interest rates that have pushed investors toward higher-growth opportunities and a skyrocketing stock market.
While no mega-IPO like Alibaba is set for the year ahead, there are some big-name companies that are scheduled to go public, including file-sharing startup Box and “fine casual” dining chain Shake Shack.
Other potential IPOs remain the subject of much speculation. Investors are watching startups such as Uber, Pinterest and Fitbit carefully, though none have yet indicated when or if they will list on public markets.
There are no surprises here, really
Jack Ma is Asia’s wealthiest billionaire.
Ma, the founder of China’s e-commerce juggernaut Alibaba, as well as a runner-up for TIME’s Person of the Year, is worth $28.6 billion, according to Bloomberg Billionaires Index. The 50-year-old is worth about $300 million more than Hong Kong real-estate-and-ports tycoon Li Ka-shing, who had been Asia’s richest person since April 5, 2012.
About half of Ma’s fortune comes from his 6.3% stake of Alibaba. The Hangzhou-based company is larger than Amazon.com and worth about $259 billion.
Will her refusal to stream for free lose her fans in a growing music market?
Earlier this year, Taylor Swift sold out Shanghai’s Mercedes-Benz Arena in one of her final concerts promoting her album Red. But today, Swift’s vociferous fans across China, just like their American counterparts, no longer have free access to her material.
This shouldn’t be surprising: Swift has removed her music from free streaming services globally, telling TIME: “I think there should be an inherent value placed on art.” But in the U.S., at least, there’s a popular option available for purchasing that art. Swift’s album sold huge amounts of copies at physical retailers like Target and on iTunes. But trade site China Music Business makes clear that the Chinese music-listening public isn’t accustomed to downloading music, and that the share of music consumption via download (as opposed to streaming) is only shrinking. In the U.S., Taylor Swift’s desire to ensure her music isn’t streamed for free is viable. There’s an existing music-sales apparatus that people are accustomed to using. Even a star of Swift’s caliber, though, may not be able to sell records in China.
This makes Swift’s removing her music from Chinese streaming services in some ways a bigger risk than her doing the same stateside, not least because those services aren’t necessarily equipped to accommodate her requirement that her music be on a special paid tier (Xiami, an Alibaba-owned streaming service with two different tiers separated by audio quality, cannot do so due to “technical issues”). Another problem for Swift: The companies have communicated almost nothing about the singer’s decision to the Chinese public. (The Spotify-Swift debate that’s still ongoing in the U.S. has as its Chinese counterpart bland statements from streaming services about “copyright reasons.” Swift has phenomenal power, to be sure. But overcoming ingrained issues with a listening public very different from America’s may well test that power’s limits.
The bigger the bust, the bigger the spending
Alibaba has a lot of consumer data at its fingertips as one of the largest e-commerce companies in the world. And just what insights is the Chinese online giant gleaning from that data? Well, Alibaba has linked women’s bra size to their online shopping habits—and it found that the bigger the cup size, the bigger the spending.
The data point no one asked for!
Alibaba vice president Joseph Tsai talked to Quartz about findings that 65% of women with a B cup fell into the “low” spending category, while those with a C cup or higher were in the “middle” and “high” demographics.
“We’ve only seen the tip of the iceberg,” he said of the company’s data-dive. “We really haven’t done even 5% of leveraging that data to really make our operations more efficient, consumers more satisfied.”
Why would we need a day devoted to buying stuff for yourself when that's what many American consumers do year-round?
In China, Nov. 11 (a.k.a. 11/11) is celebrated as Singles Day. The event originated as Bachelor’s Day in the 1990s, an anti-Valentine’s Day when those without significant others were encouraged to celebrate their non-attached status by purchasing gifts for themselves. Lately it has evolved into an all-consumers-welcomed price-slashing online shop-a-thon in China—something akin to the Black Friday-Cyber Monday weekend rolled into one day—and it’s dominated by Alibaba, China’s largest e-retailer.
Alibaba reportedly surpassed $9 billion in sales in 24 hours. For the sake of comparison, online sales in the U.S. reached $1.7 billion on Cyber Monday last year, and Black Friday 2013 e-commerce spending hit around $1.2 billion. (Sales rung up inside physical stores are far, far higher than online sales on Black Friday, of course.)
Leading up to Singles Day, some e-retailers and their public relations pros were trying to push the idea that Americans should embrace the day with Singles Day purchases of their own. Why should China have all the fun, after all? And Alibaba CEO Jack Ma told CNBC today he expects the U.S. and the rest of the world to join in Singles Day celebrations (by buying stuff–a lot of stuff) by 2019 if not sooner. At last check, slightly more than half of those voting in a CNBC poll said they would, in fact, celebrate Singles Day, compared with 37% who said nope, not gonna go there.
A potential U.S. version of Singles Day comes with complications, however, starting with the fact that Nov. 11 is already celebrated as Veterans Day. It’s one thing for retailers and restaurants to bump up store traffic and promote their brands with free food deals and Veterans Day sales on furniture, electronics, and clothes. It’s an entirely different proposition to supplant the day devoted to thanking our nation’s vets and active-duty military for their selfless service with one squarely focused on overtly selfish consumerism.
It’ll be “very, very difficult,” for retailers to get American consumers on board with Singles Day, Randy Allen, a Johnson Graduate School of Management professor, said to Businessweek. “People look at holidays that we’ve got and say, ‘Where would you fit another one in? Do I really want to have to buy gifts for another holiday? Is this really something that’s important to me?’ ”
The calendar is already full of fake holidays, many of them devoted to treating oneself—Splurge Day anyone? What’s more, the fake marketing holidays reach an especially frenzied pace around this time of year, what with “events” such as National Regifting Day and Gift Card Weekend fighting for our attention. It’s also worth reminding folks that “genuine” shopping phenomena like Black Friday and Cyber Monday are totally made-up holidays too, created for the express purpose of getting people to buy stuff.
Above all, let’s not pretend that any of these days are exclusively about gift giving. Sure, the traditional idea of holiday shopping is that you’re shopping for other people. But that’s hardly the only reason people hit the malls on Black Friday and browse online on Cyber Monday, ready to pounce on deals.
The self-gifting trend—buying yourself a “gift” during holiday shopping outings—has been popular for years. A National Retail Federation survey indicates that 6 in 10 consumers will engage in self-gifting during the 2014 winter holidays, the same proportion of self-gifters as in 2012.
Shoppers say they will spend an average of $126.88 on themselves this year, down from an estimated $134.77 during the 2013 winter holidays. Perhaps the decline comes as a result of consumers realizing they should be more focused on others rather than themselves during the holidays. Then again, maybe the shift is due to shoppers being more likely to self-gift year-round and having less reason to splurge on themselves specifically during the peak November-December season. In any event, it hardly seems urgent that a nation with a majority of self-gifters needs an individual day specifically focused on self-gifting.