Tomorrow will be a big day for gauging the appetite for quality Chinese equities. Alibaba.com -- the huge B2B site that connects companies looking to import and export Chinese goods -- is set to go public.
Logic would dictate that it will be a big winner. Alibaba initially planned on selling a 17% stake in the company to the public for roughly $1 billion -- before the deal was way oversubscribed, with reportedly $100 billion in orders flooding in.
With recent pricing suggesting a $1.5 billion sale for the 17% slice, Alibaba's market cap of $9 billion is rich, but pent-up demand should take it higher.
Alibaba will challenge that.
Goldman Sachs is forecasting a profit of $83.8 million from Alibaba.com this year, a huge 186% improvement over 2006. That's actually better than Baidu, which Wall Street expects to grow its bottom line by 113%, to roughly $80 million, this year.
Between the favorable comparables and hungry buying power, tomorrow's market debut should be golden for Alibaba.com. How do you get on this bandwagon? It's too late to buy in directly. You probably didn't have the choice connections to make it happen anyway, considering the fat-cat institutional investors who were turned away.
But you're not out of luck. You don't have to risk paying an insane sum at the open tomorrow. What's the trick? It's all in the coattails.
Reach for the fringe on the flying carpet
Several companies already benefit from the upcoming Alibaba.com IPO. Whether we're talking about direct investors, competitors, or potential buyout candidates, several stocks have been blazing in recent months in anticipation of a well-received market debut from China's B2B rock star.
Let's go over a few, in case they continue to head higher after tomorrow's Alibaba.com pop.
Yahoo! (Nasdaq: YHOO ) , of course. The company acquired what is now a 39% stake in Alibaba.com's parent company, Alibaba Group, two years ago for a mere $1 billion investment. Yahoo! also agreed to snap up 10% of the IPO. The rub here is that Yahoo! shares have already climbed 40% since bottoming out three months ago. It's not as if the company's fundamentals have improved so dramatically.
The gain adds up to roughly $12 billion in market cap. That's obviously several times more than the Yahoo! stake in Alibaba will be worth on paper. In other words, it's a tired coattail. However, one can argue that what has kept Yahoo! down, beyond its bland financials, is the stigma of being a slow-footed dot-com behemoth. Alibaba's sizzle may crack that perception, justifying the recent run.
Global Sources (Nasdaq: GSOL ) is the nearest pure play to Alibaba. It's much smaller, and growing more slowly, with its online B2B search engine accounting for just a third of its business. The balance comes from trade shows and print publications. That hasn't stopped Global Sources' shares from tripling over the past year, with most of those gains coming in recent months as we close in on the Albaba.com IPO.
Because Alibaba.com doesn't really need the money it will raise, it's likely to use that cash to acquire smaller players. Global Sources is one good candidate; Ninetowns (Nasdaq: NINE ) is another.
Ninetowns is a fallen star in the corporate space. It once provided the software to facilitate trade throughout China, until the government began offering a free version. That has dried up a lot of Ninetowns' business, though there's certainly value in its Rolodex and its loyal base of customers, who have decided to stick with the company as it drums up new commerce-related software products.
Baidu would probably be another worthy coattail -- and not just because of Baidu's recent announcement to enter the auction market next year. That move will actually be on the consumer-to-consumer side, which may affect companies like eBay (Nasdaq: EBAY ) and Alibaba.com's sister company Taobao, instead of Alibaba.com itself.
However, a significant pop in Alibaba over the next few days and weeks may raise the bar on Baidu's worth. After all, jast week's IPO of online gaming's Giant Interactive (NYSE: GA ) helped prop up the shares of fellow Chinese specialist NetEase (Nasdaq: NTES ) . Coattails can be powerful, even when they provide little more than a sympathy play.
In the end, you don't need to overpay for Alibaba tomorrow. You can, however, take advantage of the situation by cashing in on those who will. Know the coattails. They come in all shapes and colors.
What Yahoo! did on its summer vacation: