Are You Sure There’s No Bubble Lurking in the Nasdaq This Time?

Market data is displayed on the screens at the Nasdaq MarketSite in New York, Thursday, April 23, 2015. The Nasdaq composite has closed at a record high for the first time since the dot-com bubble of 2000.
Seth Wenig—AP Market data is displayed on the screens at the Nasdaq MarketSite in New York, Thursday, April 23, 2015. The Nasdaq composite has closed at a record high for the first time since the dot-com bubble of 2000.

Fifteen years after the tech wreck, the Nasdaq composite index has finally fully recovered and set a new record high. So is this time going to be any different?

The Nasdaq composite, that iconic index that came to symbolize the Internet economy of the late 1990s, has done something it hasn’t accomplished since Al Gore was relevant — it set a new record high.

The Nasdaq closed at 5092.08 on Friday, up slightly from the previous high of 5048.62 established on March 10, 2000. Of course, the last time the Nasdaq blazed new territory, the stock market slid into a decade-long funk, as the market spent years recovering from the euphoria and high prices created by the the tech stock mania.

This time around, investors seem convinced the Nasdaq is nowhere near bubble territory.

After all, many of the tech giants that dominated the Nasdaq’s late 1990s run — Microsoft, Intel, Cisco Systems and Oracle — now trade at P/E’s of 14 or below, making them even cheaper than the broad market.

But this recent Nasdaq run, which began five years, at the depths of the global financial panic, has been driven by an entirely different group of stocks.

Since this bull market began in March 2009, the best-performing group hasn’t been information tech, but rather biotech. And there are a few things you need to know about biotech’s spectacular run:

1) This biotech boom rivals tech’s run in the 1990s.
Biotech companies have soared more than 500% over the past five years, far outpacing the broader Nasdaq and S&P 500. That’s saying something because both indexes have had really good runs themselves.

^NBI Chart

^NBI data by YCharts

Indeed, over the past five years, the iShares Nasdaq Biotechnology ETF, which gives you exposure to the biotech stocks in the Nasdaq, returned 20 percentage points more annually than the S&P 500.

Yet unlike tech in the ’90s, biotech’s rise has gotten surprisingly little attention. Doug Ramsey, chief investment officer for The Leuthold Group, refers to the surge in biotech and healthcare in general as “one of the great stealth sector bull markets I’ve ever seen.”

2) Biotech is frothier than it looks.
The fact that Amgen and Gilead Sciences, the industry’s absolute biggest players, have generated strong earnings growth lately — and therefore trade at reasonable P/E’s — belies a bigger problem in the sector.

The next biggest companies in the Nasdaq Biotechnology Index aren’t so appealing from a valuation perspective. Regeneron Pharmaceuticals trades at a P/E of 157. Vertex Pharmaceuticals had no 2014 earnings. Biomarin Pharmaceutical had no 2014 earnings. Incyte had no 2014 earnings. Endo International had no 2014 earnings. and Jazz Pharmaceuticals sports a P/E of 286.

But the real problem isn’t even with these established names, but rather the smaller players in this industry. Among small-cap biotech names, “some valuations are absolutely obscene,” says Mike Tung, co-manager of the Turner Medical Sciences Long/Short Fund.

3) Biotech has a long history of booms and busts.
After showing major promise, biotech stocks have consistently found a way to let investors down — like in 1986, 1987, 1992, 1994, 1997-98, and pretty much from 2000 to the start of 2009.

To be sure, biotech bulls frequently cite the recent wave of mergers & acquisitions and initial public offerings in this space as an argument for why this rally has legs. But Panos Mourdoukoutas, an economics professor at Long Island University, argues that the M&A boom — and the race to get a piece of the action — may be exactly what turns a hot investment trend into an official mania.

MONEY stocks

How to Spot the Next Apple

David Paul Morris—Bloomberg via Getty Images

The lesson of the last tech bubble isn't just "don't go there." There were smart ways to buy tech in the 1990s, and there are smart ways now.

Tech investors swing for the fences and often ignore price, hoping to get in on “disrupters” that can overturn an industry. Companies don’t need profits to get steep valuations (see Twitter, Tesla, and Box). The mood now resembles that of the first dotcom era, which ended 15 years ago when the bubble burst in March 2000. But the lesson of that episode isn’t just “don’t go there.” There were smart ways to buy tech in the 1990s. Price did matter, combined with two other factors: a catalyst or a financial cushion. The same is true now. Here are three cases to illustrate the point.

Case 1: Apple’s Decisive Turn

Today Apple is the world’s biggest company, worth $683 billion. In 1997, though, Apple was a $3 billion computer maker bleeding market share. It traded at around six times earnings, vs. 20 for the S&P 500.

A cheap stock price wasn’t enough to make it a deal. “In tech, you have to have some semblance of a catalyst, because investors sooner or later demand revenue growth,” says Paul Meeks, a portfolio manager for Saturna Capital. His firm purchased Apple in 1998 at a split-adjusted price of $1.17, which it still owns today at $127.

Saturna couldn’t have seen the iPod or the iPhone coming. Its catalyst was the return of Steve Jobs, which signaled an overhaul of how Apple did business. Jobs immediately negotiated his company’s survival by getting a $150 million investment from rival Microsoft, and then jump-started research and development, which led to 1998’s hit iMac.

Case 2: Cash Saves Dell

In the early ’90s, PC maker Dell made big missteps, including a failed launch of notebook computers. At one point in 1993 the stock had lost two-thirds of its value. Dell still had a decent amount of cash on its balance sheet, though, allowing it to fight another day. That was key for Westwood Holdings’ buy decision in 1993, says chief investment officer Mark Freeman. In 1997, Dell reached Westwood’s target price with gains of about 1,700%.

Case 3: Oracle in 2015

A cheap stock that passes both the catalyst and cushion tests today is the enterprise software giant Oracle ORACLE CORPORATION ORCL 0.3% . Investors fear that new cloud-based services, which allow users to access software online, will eat into Oracle’s business. That’s held the stock at 13 times earnings. But Edward Jones analyst Bill Kreher argues that Oracle’s own cloud push could be a catalyst, allowing the company to cross-sell more to its customers. This will “bolster ongoing maintenance revenues,” he says. Meanwhile, Oracle has $40 billion in cash, a strong defense against would-be disrupters.

Read next: Who will win the battle of the tech titans?


5 Things Your Broker Won’t Tell You About Apple Joining the Dow

While the iPhone maker's inclusion in the Dow Jones Industrial Average is long overdue, the change itself doesn't really move the dial.

This morning, the Dow Jones Industrial Average finally got around to adding Apple, which means the most famous benchmark for U.S. stocks will now include the world’s most valuable and influential company.

“As the largest corporation in the world and a leader in technology, Apple is the clear choice for the Dow Jones Industrial Average,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices.

The official move is expected to take place on March 19, but Apple shares are already jumping on the news. The stock was up more than 1% Friday afternoon, on a day when the Dow itself was down more than 200 points at midday.

Before you get too excited, though, there are several things you ought to know about this move:

1. Apple won’t get a meaningful long-term bounce from being in the Dow.

The Dow may be closely followed, but it’s not a market mover. That’s because while there are hundreds of index funds that track the S&P 500, there are only a handful of index funds that follow the Dow. And those funds and ETFs are tiny in comparison to the more than $5 trillion invested in S&P 500-linked portfolios.

The SPDR S&P 500 ETF, for instance, controls nearly $200 billion in assets, while its sister fund, the SPDR Dow Jones Industrial Average ETF, has only around $12 billion.

2. The Dow has a record of terrible timing when it comes to adding—or deleting—companies from its average.

Consider some of the recent moves:

In February 2008, Bank of America was added to the Dow in the midst of the mortgage crisis and global financial panic, while the tobacco giant Altria was removed. Since being kicked off the list, the defensive-oriented Altria has gained more than 139%, nearly tripling the gains for the S&P 500. Meanwhile Bank of America lost two third of its market value until it was eventually kicked out of the Dow in September 2013.

In April 2004, the insurance giant AIG was added to the Dow just a few years before the company had to be bailed out from collapse by the federal government in the global financial panic. Between then and September 2008, when AIG was removed from the Dow, the stock lost more than 90% of its value.

And then there was the classic case of being late to the party with tech. In November 1999, the Dow finally decided to add Microsoft and Intel after they both experienced astronomical runs throughout the 1990s. Since being included in the Dow, Microsoft shares are down 8% while Intel stock is 12% lower. All the while, the S&P 500 has gained ground:

^SPX Chart

^SPX data by YCharts

All of this confirms a study by University of Pennsylvania finance professor Jeremy Siegel. He looked at the performance of companies that were added to and removed from the Dow between 1957 to 2006, and found that the companies deleted from the Dow tended to outperform the new additions.

3. The Dow is a strange index to begin with.

As MONEY pointed out last year, the Dow is really an antiquated benchmark. Traditional modern indexes are “market-capitalization” weighted. What that means is that the bigger a company is, based on its market value, the greater its influence on the index. That’s why Apple, as the most valuable company in the world, comprises nearly 4% of the S&P 500, versus around 2% for Exxon Mobil, which is the market’s second biggest company.

By contrast, the Dow is a so-called price-weighted index. That means that the higher a company’s share price is—not its overall value, but the arbitrary price of a single share—the greater its sway.

Right now Visa, at around $272 a share, accounts for nearly 10% of the Dow’s movements. However, Visa announced it would split its stock in four, diminishing the value of each share but not the overall company.

Dow officials cited this as a reason for including Apple. They consider Visa a tech stock, since the company works in global payment technology. But because Visa’s meaningless stock split will nonetheless reduce the Dow’s exposure to tech, Dow officials felt the move will “make room for Apple,” Blitzer said.

4. The company that Apple is replacing is vital to Apple’s success.

Don’t think the Dow is trying to make a statement about the importance of the smartphone revolution to the U.S. economy: To make room for Apple, Dow officials kicked out AT&T.

Yet the telecom giant has been a vital cog in the smartphone era, selling data plans, iPhones, Android devices, and other technology. AT&T has already begun marketing smart watches, which is important as Apple is scheduled to unveil its Apple Watch at an event on Monday.

5. Apple doesn’t need the Dow to gain credibility.

Apple is by the far the most valuable company in the world. Just with its savings account (the cash it has on hand) the company could buy three companies that are already in the Dow outright — DuPont, Caterpillar, and the Travelers Group.

What’s more, in the past two years, Apple shares have quadrupled the gains for the Dow. And since the end of 1999, Apple has soared more than 3,000% when the Dow is up barely 50%.

AAPL Chart

AAPL data by YCharts

So you could say that the Dow needs Apple, not the other way around.


Apple, Amazon, or Google: Who Will Win the Battle of the Tech Titans?

Illustration of tech robots
Harry Campbell

The Big Three tech giants each want to be the hub of your digital life. Before you invest, learn their strategies, and see which company’s vision is most likely to prevail.

The blueprint for success in technology used to be straightforward: Develop a cutting-edge product people need; build a (near) monopoly; then reap the rewards of controlling that technology—be it the software or chips that make computers run or the switches that make the Internet possible. That was how Microsoft, Intel, and Cisco Systems ruled the ’90s.

Fifteen years after the first great tech stock boom ended, the industry’s new colossal trio of Apple, Google, and Amazon couldn’t be more different from their ancestors.

They’ve created vast arrays of products, from mobile devices to streaming services to payment systems, which they tie together in various ways to support their core revenue stream. Think not of solitary giants, but of giant ecosystems. And those systems, not the latest iPhone or Google Glass or Kindle, are “the defining characteristic of the company,” says Robert Stimpson, co-manager of the White Oak Select Growth Fund.

That means evaluating the strength of those ecosystems is what a tech stock investor has to do. To help, MONEY consulted some of the smartest analysts in the business for guidance and took a hard look at the valuations investors are placing on those systems today.

Apple: Elegant Hardware and Cash to Spare

The heart of the ecosystem: More than 90% of Apple’s $183 billion in revenue in its latest fiscal year came from hardware sales—56% from iPhone sales alone.

Fuel for growth: Hardware is what Apple sells, but it’s not what the company markets. “Apple’s main product is an experience,” says tech analyst Neil Cybart. “They look at all of their products as taking away the complicated part of technology so the users can feel like they have more control over their lives.”

Apple aims to build a world in which you’ll own Beats by Dr. Dre headphones, wear an Apple Watch, buy coffee with the Apple Pay payments system, and make hands-free phone calls via Apple CarPlay. With all those products interlinked and running on Apple’s iOS software, you’ll rely on the ecosystem for daily tasks, making it a hassle for you to buy your next phone or tablet from anyone other than Apple.

Potential threats: Apple has a hit with the iPhone 6 and 6 Plus, selling an estimated 60 million of the phones last year. Indeed, as TIME recently reported, the iPhone 6’s success has cut into Android’s smartphone market share in the U.S. for the first time since September 2013.

But the company isn’t particularly good at ­enticing the owner of one Apple product to purchase another, says Consumer Intelligence Research Partners’ ­Michael Levin.

For instance, only 28% of iPhone owners have an Apple computer, and less than half of them own a tablet, says CIRP. Sales for the iPad have fallen 4% over the past year, acknowledges Apple. But CEO Tim Cook, noting that the company has sold 237 million iPads over four years, told investors in October that he’s “very bullish on where we can take the iPad over time.”

Outlook: BUY

Apple enjoyed a banner year in 2014. Spurred by sales of the latest iterations of the iPhone and anticipation of the Apple Watch’s release in March, the company’s stock rose 40%.

Despite that gain, Apple’s price/earnings ratio, based on projected profits, is just 13.8. That means the stock trades at a 16% discount to the S&P 500 technology index, even though the company’s earnings are growing 33% faster than the average big tech stock’s.

Apple’s low valuation stems from factors such as investors’ doubts that a company its size can grow as fast as smaller tech firms, along with uncertainty that Apple will keep making products that are both popular and profitable.

That said, Apple is still the best company by far at creating exciting technology that people want to buy. Plus, signs point to an ever-increasing dividend from the stock, which now yields 1.8%; a larger payout can be easily covered by Apple’s $155 billion cash reserves. Sales Grow, but Earnings Are Scarce

The heart of the ecosystem: Already the world’s biggest online retailer, racking up $85 billion in annual sales, Amazon aims to catch up to the world champion, Wal-Mart, which has just under half a trillion in revenue.

To close that gap, Amazon wants to convert more customers to Amazon Prime, the two-day shipping service now priced at $99 per year. Amazon Prime members make twice as many purchases as nonmembers, and they spend 40% more per transaction, reports ComScore. Prime customers are also loyal: 92% say they’ll renew their subscriptions.

Fuel for growth: To get more people to join Amazon Prime—and buy more goods per year—Amazon has morphed into a streaming-media and mobile-device company.

In 2011 the e-tailer began offering Prime members access to instant streaming movies and television shows; the retailer now produces its own TV programs as well. To ­sweeten Prime, Amazon recently added a streaming-music service and free online photo backups. Plus, when the company launched its Fire smart­phone last year, a one-year Prime membership came bundled free with the device.

The result: There are now an estimated 30 million Prime members, up from around 5 million in 2011.

Potential threats: Amazon has spent heavily on the entertainment it’s using to lure new Prime sign-ups. The company has posted cumulative losses of more than $350 million over the past 10 quarters—vs. the $94 billion in profits Apple churned out. Amazon CEO Jeff Bezos is unapologetic; last year, he reprinted a 1997 letter to shareholders saying that “long-term market leadership” was more important than “short-term profitability.”

One hit to profitability has been the Fire phone. While 10 million iPhone 6’s were purchased the first weekend they went on sale, Amazon reportedly sold only 35,000 of its smart­phones in the first month. Late last year the company took a $170 million charge stemming from the fiasco.

Amazon is learning a hard lesson. It may be a hot retail brand—but not when it comes to cutting-edge technology. “There are people who say, ‘I’m an Apple guy,’ ” says Kevin Landis, a longtime tech investor who runs the Firsthand Technology Opportunities Fund. “I haven’t heard anyone say, ‘I’m an Amazon guy.’ ”

Outlook: SELL

Despite losing a quarter of their value last year, Amazon shares still trade at a whopping P/E of nearly 100, owing to the fact that the company is barely profitable. And even if Amazon cuts costs, problems are likely to persist.

While traditional technology companies enjoy big profit margins, retailers like Amazon don’t, notes Christopher Baggini, a portfolio manager at Turner Investments. Amazon’s operating profit margin has historically been in the low single digits, compared with 20% to 30% for Apple and Google. That means even if Amazon stops spending on losers like the Fire phone, it won’t have Apple and Google’s resources to keep building out its ecosystem.

Google: Helped and Hindered by an Open System

The heart of the ecosystem: Given Google’s driverless cars, ­Internet-connected glasses, and smartphone-linked Nest thermostat, you might think this company was all about the future.

Actually, a lot of what Google is working on is meant to reinforce the past: the company’s roots as a search engine reaping ad dollars based on what people look for online. Advertising still generates about 80% of the company’s $64 billion in annual revenues.

Fuel for growth: The Android operating system, which Google launched in 2007, is essential for protecting its search franchise.

Well before the rise of smart­phones, Google management foresaw that the biggest threat to its business wouldn’t be a rival search engine, says Connor Browne, manager of the Thornburg Value Fund. Rather, he says, the company saw that danger lay in adoption of new hardware: As people shifted from PCs to mobile devices, manufacturers could conceivably eliminate Google’s technology from their products.

Android was the company’s defense against gatekeepers like Apple. While Google doesn’t make much money off the software, An­droid puts the company’s search technology at the fingertips—or voice control—of more than 1 billion people.

For further revenue growth, Google may have to rely on rival Apple’s stronger talents for setting technology trends. Just as Apple’s marketing efforts for the iPhone and iPad created whole new markets for smartphones and tablets, the Apple Watch, scheduled for release in March, could bring wearable devices into the mainstream. Android-based watches came on the market last year, but Apple’s introduction could spark sales industrywide.

The situation is similar for Goo­gle Wallet, the electronic-payment platform that has found less traction in its first three years than Apple Pay did in its first three months. “Google will benefit from Apple making headway in creating a walletless society,” says White Oak’s Stimpson, whose fund owns Google shares.

E-payments are actually more central to Google’s core ad business than to Apple’s success. If you’re watching a video on Google-owned YouTube, for example, companies can run messages tailored to your interests. It would be a natural step—and also seamless—for you to buy an advertised item via Google Wallet.

Potential threats: Start with Android itself. Unlike Apple’s iOS operating system, Android is open source, meaning that Google’s “partners” can tweak it. When Amazon built its Android-based Fire phone last year, it stripped out Gmail and Google Play Store. Fire phones and Kindle tablets link instead to the Amazon Appstore, which competes with Google Play and iTunes.

Similarly, Google can’t dictate which version of Android hardware makers employ. Google Wallet’s convenient “tap and pay” function, for example, requires versions of the operating system that are installed on only 34% of Android phones.

Google also faces threats from other major players. The Chinese e-commerce giant Alibaba, for one, has developed its own smartphone operating system, which could cut into Android’s 80% share of mobile devices in China.

Google executive chairman Eric Schmidt acknowledges the company faces threats known and unknown. “Someone, somewhere in a garage is gunning for us,” he said in an October speech. “I know, because not long ago we were in that garage.”

Outlook: HOLD

As Google’s earnings growth rate has declined, so too has its P/E ratio—from around 25 last year to 18. That means Google stock is 25% cheaper than the average for Internet companies in the S&P 500, even though it’s traditionally been on par.

Paul Meeks, a portfolio manager at Saturna Capital, which owns the stock, notes that there may be more rockiness ahead, as Google keeps reporting lower ad prices. Once that stabilizes, he says, the stock should start to rebound, just as you’d expect any sound ecosystem to recover from a minor disturbance.

In both cases, though, the healing takes time.

See all of the 2015 Investor’s Guide


MONEY tech stocks

Twitter Becomes Latest Victim of October’s Mini Tech Wreck

Twitter logo on iPad
Chris Batson—Alamy

Twitter joins a long list of tech heavyweights including, Google, Netflix, and Yelp that failed to beat Wall Street estimates — and whose stock got clocked.

In case you haven’t noticed, this has been a miserable month for tech — especially for those companies that couldn’t find a way to beat Wall Street’s expectations.

Just ask Twitter. The social media darling did pretty much everything that analysts has asked. The company more than doubled its quarterly revenues, posting sales of $361 million. Twitter turned an actual profit, albeit a mere penny a share. But that was what Wall Street analysts had been expecting.

Meanwhile, the company reported that the number of active users grew 23%; timeline views (Twitter’s equivalent of website page views) increased 80%; and ad revenues from those page views increased 83%. Still, as UBS analyst Eric Sheridan told USA Today, the results lacked “upside surprise.”

The result: Investors pummeled the stock, which lost more than 10% of its value in after-hours trading Monday.

TWTR Price Chart

TWTR Price data by YCharts

Twitter wasn’t the only technology company to be taken out to the woodshed.

Last Thursday, did what it usually does — the e-commerce giant reported robust sales growth, but couldn’t manage to turn a profit amid its massive build out. Investors weren’t in a forgiving mood, shaving more than 8% off the stock’s price:

AMZN Price Chart

AMZN Price data by YCharts

The day before that, Yelp reported decent results, but the review site warned investors that fourth quarter sales would fall short of expectations. The result: Investors erased nearly a fifth of the value of the social media company:

YELP Chart

YELP data by YCharts

The week before that, Google reported strong profits, but said that the amount of money it is making per ad is falling. That was enough to knock the stock down.


GOOGL data by YCharts

And the day before that, Netflix announced it attracted far fewer new U.S. members for its streaming video service than was previously estimated. That was enough to erase more than a fifth of the company’s market value:

NFLX Chart

NFLX data by YCharts

MONEY stocks

Billionaire Larry Ellison Steps Down as Oracle CEO

Ellison, the 5th-richest man in the world, founded the software company in 1977. It's now one of the largest technology companies in the U.S.

MONEY tech stocks

5 Winners and 5 Losers of the Alibaba IPO

Alibaba founder Jack Ma
Edgar Su—Reuters Alibaba founder Jack Ma gives a thumbs-up as he arrives to speak to investors at an initial public offering roadshow in Singapore September 16, 2014.

Both lists include some surprising players who will be directly or indirectly affected by the e-commerce giant's record stock offering.

Depending on how things go on Friday, when Alibaba starts trading on the New York Stock Exchange, there could be tens of thousands of winners from what’s expected to be a record initial public offering.

But as with all things in life, there are winners and then there are winners. Here’s a rundown of who those really big winners are apt to be, along with some potential losers.

The Winners

1) Jack Ma, Alibaba founder and CEO

This former school teacher turned Internet mogul doesn’t need Alibaba’s IPO to go gangbusters. He is already the richest man in China, worth approximately $22 billion, according to Bloomberg. For Ma, who personally owns around 9% of Alibaba shares, any boost in the stock’s estimated value post-IPO will simply be icing on the cake.

Ma’s real victory comes in the retention of power. Because the Chinese government forbids foreign ownership of key strategic assets in China, this IPO is structured in an unconventional way. As MONEY points out in “No, Alibaba is Not the Next Facebook (and 4 Other Myths About this Mega-IPO Debunked,” investors who buy the stock don’t technically get to own the company. Ma and a group of Chinese citizens who founded and help run Alibaba are still the technical owners of the company’s assets.

Rather, investors simply get the rights to the profits that are sent to a holding company known as a “variable interest entity,” which is based in the Cayman Islands.

The upshot is, Ma gets to raise $25 billion in capital by going public, yet he is not beholden to his shareholders in the same way other publicly traded companies are. In other words, Ma gets his money without having to give up any power. That’s like winning the lotto.

2) Masayoshi Son, founder and CEO of Softbank

Son, who runs the Japanese tech and telecom giant Softbank, is now the richest man in Japan, worth nearly $20 billion, according to Forbes. For that, he can thank one of the greatest investment decisions in modern history.

In 2000, at the height of the tech bubble, Son invested $20 million in a Chinese startup and encouraged its founder, Jack Ma, to hang on during tough times.

That proved to be beyond smart. Son’s $20 million turned into around $55 billion in less than a decade and a half, which is another reason why Son is sometimes referred to as the “Bill Gates of Japan.” This is sweet redemption for an Internet visionary who reportedly lost upwards of $70 billion in wealth when the tech bubble burst in 2000.

3) Softbank and Sprint

Much has been written about how Yahoo owns around one fifth of Alibaba’s shares. Well, Masayoshi Son’s Softbank — the Japanese tech, telecom and Internet giant — owns more than a third of the e-commerce giant.

For Softbank, owning Alibaba will help it attract global investors who want an indirect — and more diversified — way to gain exposure to the Chinese company. In addition to its large stake in Alibaba, Softbank is a major player in the Japanese mobile phone market; has its hands in hundreds of tech and media companies throughout the world; and owns a 70% stake in Sprint.

Now Softbank will have a pile of cash to make strategic acquisitions to strengthen Sprint, which for years has lagged its larger competitors Verizon and AT&T. At the very least, Softbank can invest some if its Alibaba winnings in Sprint by improving its infrastructure.

4) Snapchat

After its IPO, Alibaba will have $25 billion burning a hole in its pocket. Already, Wall Street and Silicon Valley are drawing up a list of potential takeover and investment targets.

High up on that list is Snapchat. Yes, talks between the two companies — which would have had Alibaba take a minority stake in the messaging app business — ended more than a month ago.

But that may have been because of the noise surrounding Alibaba’s IPO, and the fact that Snapchat raised around $20 million in funding through another means: via the venture capital firm Kleiner Perkins Caufield & Byers. Forbes reports, though, that this represents just 3% to 5% of the company, whose overall value is said to be around $10 billion. So there’s plenty of opportunity for Alibaba to get a piece of the pie.

Alibaba isn’t the only deep-pocketed suitor reportedly interested in Snapchat. The company has already turned down an offer from Facebook, and there are rumors that Microsoft, which has developed a similar app to Snapchat called Windup, is also interested in buying the firm. Surely, having Alibaba circling this pond will only drive Snapchat’s price higher.

5) ShopRunner

Alibaba has made a lot of small investments in U.S. companies, ranging from the app search engine Quixey to the messaging service Tango to the transportation app Lyft. But its $200 million investment in the online shopping site ShopRunner is the most intriguing because of how Alibaba may leverage it down the road.

Alibaba now owns 39% of the online service, which is aiming its sights on Think of ShopRunner as a virtual mall, in which small storefronts of well-known retailers like Brooks Brothers, Neiman Marcus, and Eastern Mountain Sports can be found. As with Amazon Prime, ShopRunner charges a flat fee (in this case, $79 annually) in exchange for free 2-day shipping on purchases made throughout the year. Quartz points out that the model is similar to Alibaba’s Tmall, where the company gets a small cut for every item sold on top of the annual subscription fee.

While ShopRunner pales in comparison to Amazon right now, that could change if Alibaba decides to throw its full weight behind this service and uses this franchise as its American version of Tmall.

The Losers:

1) Yahoo

It sure seems odd to describe a company that owns around a fifth of one of the most valuable businesses in the world — a stake that’s worth about $35 billion — a loser.

But here’s the deal: Yahoo, by agreement, must sell around 27% of its stake in Alibaba at the IPO. And as it sells its stake, Yahoo shares will begin to lose the one thing that has wooed investors so far this year: that Alibaba mystique.

Soon after, pressure will grow on Yahoo CEO Marissa Mayer to use the proceeds of the Alibaba investment wisely, for future acquisitions. But Yahoo doesn’t exactly have a great track record with companies purchased. Remember its $1 billion acquisition of Tumblr? As the New York Times recently pointed out, “Yahoo’s chief executive, Marissa Mayer, will find out how investors value the businesses she actually runs.”

2) Tencent

Tencent Holdings is a Chinese Internet company that competes head to head with Alibaba in a variety of businesses, ranging from online advertising to e-payments. Up until now, Tencent has been the largest Chinese internet stock, with a market value of around $150 billion. That will all change after Friday, when Tencent will drop to No. 2.

Moreover, in the run-up to Alibaba’s IPO, Tencent and other Chinese stocks have gotten short shrift as investors have fixated on Alibaba. See the chart below:


TCEHY data by YCharts

3) Uber

What threat does a giant online retailer like Alibaba pose to a mobile ride-sharing service? Well, in the U.S., Alibaba recently joined a group that invested $250 million in Uber’s rival Lyft. Meanwhile, in China Alibaba is taking on Uber by backing the taxi-booking service Kuaidi Technology.

As Fortune recently pointed out, Kuaidi has gone from zero to 100 million users and 1 million drivers in two years.

4) The Nasdaq

The Nasdaq is synonymous with hot tech stocks, such as Facebook and Google. But when Facebook went public two years ago, things did not go smoothly. Trading started about half an hour later than expected, traders complained of missed orders, and there were questions if investors were getting the prices they expected. Nasdaq officials admitted that they were embarrassed by the glitches.

It came as no surprise, then, that Alibaba chose to list on the NYSE over the Nasdaq. According to Reuters, “Alibaba executives worried about Nasdaq’s ability to handle their $21 billion initial public offering later this month, since the exchange botched Facebook’s market debut two years ago.”

5) Baidu

Baidu, which runs the biggest search engine in China, has been among the most popular Chinese stocks held by U.S. investors. In fact, a ranking of stocks held by hedge funds this year showed Baidu as the top Chinese entrant, according to Business Insider. What’s more, Baidu was ranked as the most widely held American Depository Receipt (a type of foreign equity holding listed on American stock exchanges) last year.

That’s likely to change as Alibaba is an even bigger Chinese tech play, and it’s considerably more diverse in its holdings than Baidu.

MONEY tech stocks

No, Alibaba Is Not the Next Facebook (and 4 Other Myths About This Mega-IPO Debunked)

An employee is seen behind a glass wall with the logo of Alibaba at the company's headquarters on the outskirts of Hangzhou, Zhejiang
Chance Chan—Reuters

A reality check on this e-commerce giant, in advance of the Chinese tech stock's much anticipated initial public offering.

Everything about Alibaba, the Chinese e-commerce giant, seems larger than life.

Its initial public offering, slated for Sept. 19, is expected to be the biggest IPO in U.S. history, raising possibly $25 billion.

The company is also China’s largest retailer, not to mention the biggest e-commerce player in the world, dwarfing U.S. companies like eBay EBAY INC. EBAY 2.36% and AMAZON.COM INC. AMZN 0.07% . Indeed, in the media, Alibaba has been described as China’s eBay, Amazon, and Google all rolled into one. Wow.

Of course, whenever there’s a convergence of three of the market’s favorite topics — tech investing, Chinese stocks, and IPOs — hyperbole has a way of creeping in.

So here’s a realistic look at the biggest myths about Alibaba that will help you put the stock in perspective.

Myth #1: Alibaba will be the most important stock to hit the market since Facebook.

Reality: Alibaba’s IPO may be bigger than Facebook’s, but its shares will have far less impact on the broader market.

Even though Alibaba is going public on the New York Stock Exchange, it’s technically not an American company. And that means the stock is not eligible for inclusion in the S&P 500 index, says Howard Silverblatt, senior index analyst with S&P Indices.

That, in turn, means that funds that track the major U.S. indexes will not be allowed to buy the stock, so the shares will have far less impact on how the broad market performs.

Plus, Alibaba is likely to be more volatile than other big tech stocks, as it won’t be included in those index funds that are required to hold all the stocks in their respective benchmarks in good times and bad. As Kevin Landis, chairman and president of the Firsthand Funds recently told Reuters: “There is a pretty strong argument that index inclusion equals stability.”

Reuters points out that by choosing to list on the NYSE rather than the Nasdaq, Alibaba gave up the possibility of being included in another well-tracked index: the Nasdaq 100.

Myth #2: Alibaba is like Amazon, eBay, and Google all rolled into one.

Reality: Alibaba isn’t China’s only Amazon, eBay or Google.

If you just read the headlines, you’d think that Alibaba is like the Borg — an intimidating collective that methodically goes from market to market devouring everything in its path. Yet the truth of the matter is that Alibaba, despite its size, faces stiff competition even in its home market.

Take the Google GOOGLE INC. GOOGL 0.79% comparison. Alibaba is often described as the Google of China not because it runs a search engine, but because it leverages its consumer website for online advertising revenue.

But you know who else does that? BAIDU INC. BIDU -0.85% , which is the Google of China because it runs the leading search engine and uses it as a source of online ad revenues. Baidu is a $75 billion company that trades on the Nasdaq and can be found in some of the leading U.S. growth stock funds, such as T. Rowe Price Blue Chip Growth.

As for the Amazon comparisons, don’t forget that there is already an Amazon of China, which is listed on the Nasdaq: It’s called JD.COM INC ADS EA REPR 2 COM 'A' SHS JD -0.36% , a $40 billion company that went public in the U.S. earlier this year. is a retailer that sells directly to consumers, but it also runs an online marketplace where other sellers can find consumers — much like Amazon as well as Alibaba’s Tmall.

Alibaba is actually closest in structure to eBay, as it runs a consumer-to-consumer online auction site in addition to an electronic payment service called Alipay that’s a lot like eBay’s Paypal.

Here too, though, there’s stiff competition. Tencent Holdings TENCENT HOLDINGS LTD. TCEHY 1.09% , a Chinese Internet and media company, operates Tenpay. Baidu offers Baidu Wallet, and there there are scores of Chinese banks that are getting in on the e-pay game.

Myth #3: You will own the most important Chinese company through this IPO.

Reality: Actually, this IPO won’t give you any ownership stake in the company at all.

Alibaba’s offering is being portrayed as an opportunity to own the most important company in China. Technically, the shares you buy won’t give you any ownership stake in this company. That’s because the Chinese government restricts foreign ownership of key strategic assets.

To get around this, Chinese companies that list abroad have come up with a complex structure called a “variable interest entity.” In Alibaba’s case, the VIE is based in the Cayman Islands and is entitled to the profits that Alibaba in China generates.

This may sound like a distinction without a difference, but it can lead to major complications. For instance, even though many Chinese companies including Baidu have gone public using VIE’s, the Chinese government has not ruled on the full legality of such a structure, the New York Times has reported.

Plus, disputes over transparency are bound to rise as foreign owners have no say in the actual operation of the underlying company. In a famous case in 2011, Yahoo, a long-standing investor in Alibaba, got into a dispute with co-founders Jack Ma and Simon Xie, claiming that they had improperly moved the Alipay bill-paying unit out of the the part of Alibaba that Yahoo partially owned an interest in.

The dispute was eventually resolved, but because the shareholders of the company (in the 2011 case, Yahoo; but going forward the public) don’t actually own and control the underlying company that generates the profits, disputes like this are bound to arise.

Myth #4: CEO Jack Ma is the Jeff Bezos of China.

Reality: Jack Ma is more like Jack Welch than Jeff Bezos.

Because Alibaba is a big player in e-commerce like, founder and CEO Jack Ma is often compared with Amazon founder and CEO Jeff Bezos.

But while Bezos is a consummate disrupter who is leveraging technology to change the way we consume, Ma seems to have none of these types of ambitions. Instead, there’s a growing sense in management circles that Ma is simply like an old-school head of a conglomerate who just wants to dominate every business his company is involved in.

“Alibaba doesn’t look much like Facebook, Google, or even Amazon,” Walter Frick recently argued in the Harvard Business Review. “Instead, it operates more like GE.”

Frick went on to cite this passage from a 2010 Harvard Business School case study on Alibaba written by professor Julie Wulf:

By his own admission, Ma was a fan of Jack Welch, so it was only natural that his organization came to resemble that of GE in some regards. Just as Welch did not dictate an overall theme or strategy for GE, Ma preferred not to set one agenda from Alibaba’s corporate center, but rather to have each subsidiary set its own strategy. Much like Welch’s famed “#1 or #2” objective for each of these businesses, Alibaba’s governance inspired its subsidiaries to be the leaders of their respective industries. Ma explained, “Business unit presidents must have the freedom to do what is right for their business. I want business units to compete with each other…and focus on being the best in their businesses.

This would explain why the company is involved not just in online retail, but in wholesale supply, logistics, computer services, cloud computing, media, marketing, and finance.

Myth #5: Alibaba threatens U.S. tech and e-commerce companies.

Reality: Alibaba’s growth lies in China, not in the U.S. .

There’s a stat floating around that says Alibaba controls some 80% of all Chinese e-commerce. That makes it sound like Alibaba is done conquering its home market and is looking abroad because that’s the only way to grow.

In reality, Alibaba is a big player in what is still a developing marketplace in China for online sales. By sheer numbers, China is a huge market, but less than half its households are online, and consumer spending makes up only around a third of its economic activity (compared with two thirds in the U.S.).

So future growth will be attained by making sure that it continues to control a large swath of the Chinese market as more and more consumers get online and as consumer spending there becomes a bigger and bigger part of the country’s larger economy.

In the U.S., the company has launched small efforts, including its 11 Main marketplace. But as MONEY’s Kristen Bellstrom recently noted, “At least in its current form, 11 Main is no match for America’s current online retail kingpins.”

Just as U.S. firms ranging from Wal-Mart to Netflix have run into cultural difficulties and stiff competition abroad, Alibaba has to figure out the nuances of American consumers and tastes before it can even try to conquer this market.

More likely, Alibaba’s goal at this point is limited to attracting Western investors and — as Greg Besinger pointed out in the Wall Street Journal — establishing a foothold in the U.S. so it can start selling more American-made goods to its Chinese customers.

So American e-commerce companies should relax — at least for the moment.

MONEY stocks

What’s Going on With the Boom in Profitless Stocks?

Man looking at bubble
Katrina Wittkamp—Getty Images

For the first time since the dotcom era, 83% of this year's IPOs have negative earnings. Does that mean we're in a new tech bubble?

For investors looking to place bets on newly public companies, 2014 has been an amazing year. Through the month of August, 204 businesses have held initial pubic offerings for their stock, for a combined value of $46.4 billion. According to the Wall Street Journal, both of those numbers are the highest the IPO world has seen since 2000.

But 2014 is close to setting another millenium record: The percentage of IPOs where the company has negative earnings–that is, is losing money–is nearing a 14-year peak. A report from Asset Allocation Advisers, using data from SentimenTrader, shows the proportion of in-the-red IPOs recently hit 83%, just one point lower than their previous high in 2000. That year seems to be coming up a lot–remind me what happened around then?

ycharts_chart (1)

Oh, right.

The last time such a large share of IPOs were profitless was at the top of the dotcom bubble, and when that bubble burst, the S&P 500 lost almost half of its value. Gregory Schultz, co-owner of Asset Allocation Advisers, and co-author of the report, thinks more earnings-free IPOs are one indication the tech bubble is back.

“It might come in the same box with a different color bow, but like Yogi Berra said, it’s deja vu all over again,” Schultz told MONEY. “The impression I get is if you have a mobile app and a website, you can gather money.”

Why is the market so willing to support the latest web startup, never mind profits? Schultz thinks low interest rates and the Fed’s policy of “quantitative easing” have made investors are more willing to put their cash in risky ventures in hopes of capturing a higher return.

But while some think the new IPO boom could mean the market is overvalued, others see a different explanation. Rich Peterson, an analyst at S&P Capital IQ, says a surge in profitless IPOs is actually driven by the kind of companies seeking public investment. And it’s not just tech stocks. “One of the more popular or active sectors for IPOs has come in the biotech field,” says Peterson. His numbers shows this type of firms taking up about 22% of year’s IPO market so far. “By their nature, biotechnology companies don’t make money [early on], they burn through a lot of cash, so it’s not surprising.”

Early indicators suggest most of 2014’s IPO class is actually doing quite well. Of the 134 companies that did IPOs this year and reported second quarter earnings, 72 beat analyst expectations, and only 54 missed their mark. Peterson cautions that an IPO’s early success does not guarantee good results in the long run, but says the high share of zero-profit IPOs does not concern him.

Of course, the simplest explanation for more earnings-negative IPOs is that stocks are currently in high demand. The S&P 500’s price-to-earnings ratio, based on ten years of average earnings, is a little above 25. That’s higher than historical norms, meaning the public is willing to pay a lot for equities in general. When investors are especially eager to buy stock, it makes sense for companies to obtain capital (or for founders to cash out) by selling shares. In short, the rise of the no-profit IPOs is a predictable side effect of the market boom. Less predictable is when the boom ends.

MONEY Google

The 8 Worst Predictions About Google

Magic 8-ball with Google logo

In the 10 years since Google became a public company, there have been a lot of predictions made about the search engine giant. And it turns out, a lot have been wrong.

”I wouldn’t be buying Google stock, and I don’t know anyone who would.”
— Jerry Kaplan, futurist, in the New York Times, Aug. 6, 2004

The problem with making any public pronouncement about Google GOOGLE INC. GOOGL 0.79% is that if you end up being embarrassingly wrong, someone can just Google that prediction to remind you how off the mark you were.

So that’s what we did.

With Tuesday being the 10th anniversary of the tech giant’s historic IPO, MONEY Googled the sweeping predictions that were made about the company and the stock leading up to and after the company’s public offering on Aug. 19, 2004, when Google shares began trading at an opening price of $85 a share.

To be fair, no one could have really predicted the stock would soar more than 1,000%—10 times greater than the S&P 500 index—in its first decade as a publicly traded company. You have to remember that in 2004, the Internet bubble was still a recent memory and Google’s offering was seen as the first significant tech IPO in the aftermath of the 2000-2002 tech wreck.

Still, it’s hard not to wince at some of the things said about what is now the third most-valuable company, with a market cap of nearly $400 billion.

1) Google won’t last.

What are the odds that it is the leading search engine in five years, much less 20? 50/50 at best, I suspect… — Whitney Tilson, The Motley Fool, July 30, 2004

In a memorable 2004 column, value investor Whitney Tilson argued that there was a significantly better chance that Dell would still be a leading computer company in the year 2024 than Google would be a leading search engine in 2009.

Obviously, he was wrong as Google still controls nearly 70% of all search and more than 90% of the growing mobile search market. (Meanwhile, Dell’s PC market share has shrunk considerably and desktop computers aren’t even a growth area anymore).

His argument may have made sense at the time. “Just as Google came out of nowhere to unseat Yahoo! as the leading search engine, so might another company do this to Google,” he wrote, adding that “I am quite certain that there is only a fairly shallow, narrow moat around its business.”

Yet Tilson made the mistake of underestimating the actual search technology. In the early 2000s, Google’s algorithms could search billions of pages at a time when rival search engines were able to get to just tens of millions. That lead in search capability gave Google enough time to leverage that technology into a dominant position in online advertising. Today, Google controls about a third of all global digital ad dollars.

2) Google’s founders won’t last.

These Google guys, they want to be billionaires and rock stars and go to conferences and all that. Let us see if they still want to run the business in two to three years. — Bill Gates at Davos, in 2003.

Microsoft co-founder Bill Gates was, of course, referring to Google co-founders Sergey Brin and Larry Page. Not only did the Google guys not go away, eight years later Page took over as CEO, and under his tenure the company became the dominant player in the smartphone market; made inroads into social media and e-commerce; and began dabbling in more futuristic technologies such as driver-less cars that are likely to boost interest in the stock going forward.

3) Google is a one-trick pony.

I mean, come on. They have one product. It’s been the same for five years — and they have Gmail now, but they have one product that makes all their money, and it hasn’t changed in five years. — Steve Ballmer, former CEO of Microsoft, in the Financial Times, June 20, 2008.

The bombastic Ballmer, who also predicted that the iPhone would go nowhere, wasn’t the first to call Google a one-trick pony. Yet Ballmer was flat out wrong. Today, Google has several tricks up its sleeve. The company still dominates search, but it is also a major player in mobile search, mobile operating systems, online advertising, e-commerce, social media, cloud computing and even robotics.

4) And who cares about search anyway?

Search engines? Aren’t they all dead? — James Altucher, venture capitalist (sometime in 2000)

You have to give Altucher credit for fessing up to what he admits may have been “the worst venture capital decision in history.” Three years ago, the trader/investor blogged about how his firm, 212 Ventures, had an opportunity in 2000 or 2001 to be part owner of the company that would later become an integral part of Google for a mere $1 million.

As he told the story, one of the associates of his firm had approached him with an opportunity in 2000. “A friend of mine is VP of Biz Dev at this search engine company,” the associate told him. “We can probably get 20% of the company for $1 million. He sounds desperate.”

To which Altucher replied: “Search engines? Aren’t they all dead? What’s the stock price on Excite these days? You know what it is? Zero!”

“No thanks,” Altucher said. That company was Oingo, which changed its name to Applied Semantics, which in 2003 was purchased by Google and re-branded AdSense. As Altucher points out, “Google needed the Oingo software in order to generate 99% of its revenues at IPO time. Google used 1% of the company’s stock to purchase Oingo, which meant that Altucher’s potential $1 million bet would have been worth around $300 million in 2011.

Oh well.

5) Microsoft will chase Google down.

Word has it that Microsoft will feature an immensely powerful search engine in the next generation of Windows, due out by 2006… As a result, Google stands a good chance of becoming not the next Microsoft, but the next Netscape. — The New Republic, May 24, 2004.

Alas, Microsoft’s Bing search engine didn’t come out until three years after the article said it would. And it wasn’t until last year when Microsoft truly embedded Bing into Internet Explorer on Windows 8.1.

Even if Bing gains traction on desktops — where it still only has about a 19% market share — search is transitioning to mobile. And there, Google utterly dominates and will probably stay in control because its Android operating system powers around 85% of the world’s mobile devices, versus Windows’ mere 3% market share.

6) Google isn’t a good long-term investment.

Don’t buy Google at its initial public offering. — Columnist Allan Sloan, Washington Post, Aug. 3, 2004.

I’m back from the beach and it’s clear that my advice turned out to be wrong…But now that the price is above the original minimum price range, I’m not in doubt. So I’ll repeat what I said three weeks ago. This price is insane. And anyone buying Google as a long-term investment at $109.40 will lose money. — Allan Sloan, Washington Post, Aug. 24, 2004.

Well, investors didn’t lose their shirts. A $10,000 investment in Google back then would have turned into more than $110,000 over the past decade. By comparison, that same $10,000 invested in the S&P 500 would have grown to less than $22,000. Howard Silverblatt, a senior index analyst for S&P ran some numbers and discovered that only 12 stocks currently in the S&P 500 wound up outpacing Google during this stretch.

To his credit, Sloan, now a columnist at Fortune, later admitted that “I was wrong, early and often, on Google’s stock price when it first went public, for which I ultimately apologized.”

7) Google isn’t a good value.

If you have any doubts at all about Google’s sustainability — you may, for example, recall that Netscape browsers used to be just as ubiquitous as Google home pages — you shouldn’t touch the stock unless its market capitalization is well under $15 billion. — MONEY Magazine, July 2004.

Okay, so we’re not infallible either. If you had followed MONEY’s line of thinking, you never would have purchased this stock because at the opening price of $85, the company was already valued at $23 billion. And it never dipped below that level on its way to a near $400 billion market capitalization today.

MONEY based its analysis on numbers crunched by New York University finance professor Aswath Damodaran, an expert on valuing companies.

Damodaran came to the $15 billion assessment after figuring that Google would generate a total of nearly $48 billion in cash over its lifetime. That turned out to be a bit off, as Google has generated that amount of free cash flow in just the past five years.

Again, this was an example of how difficult it is to estimate the future value of a corporation based on what the company is up to at the moment.

8) Google will avoid being evil.

Don’t be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company. — Google’s 2004 Founders’ IPO Letter.

Now, evil is in the eye of the beholder. Some privacy buffs think Google long crossed the line when it began tracking user behavior across all of its services including search, Gmail, You Tube, etc.

Progressives, meanwhile, point to Google’s lobbying efforts as a sign the company is behaving like any other corporation. The company has reportedly contributed to conservative causes such as Grover Norquist’s Americans For Taxpayer Reform, which seems to belie the company’s left-leaning Silicon Valley culture.

Then there’s the fact that Google’s chairman Eric Schmidt has stated that he is proud of how the company has managed to avoid billions in taxes by holding company profits in Bermuda, where there is no corporate tax.

Whether you think this qualifies as evil or not, it highlights what folly it was to try to ban evil.

As Schmidt stated in an interview with NPR:

“Well, it was invented by Larry and Sergey. And the idea was that we don’t quite know what evil is, but if we have a rule that says don’t be evil, then employees can say, I think that’s evil,” he said. “Now, when I showed up, I thought this was the stupidest rule ever, because there’s no book about evil except maybe, you know, the Bible or something.

4 Crazy Google Ambitions
10 Ways Google Has Changed the World

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