(Adds data on fund holdings)
By Deepa Seetharaman and Ryan Vlastelica
SAN FRANCISCO/NEW YORK Aug 26 Investors are
looking over portfolios to make room for Chinese e-commerce
giant Alibaba Group Holdings Inc's market debut next month - and
that means some less attractive stocks that funds are holding
might be shown the door.
The initial public offering, which could top $16 billion to
become the largest-ever IPO by a technology company, is expected
as early as next month after Alibaba management kicks off a
two-week investor road show after the Labor Day weekend.
As investors take a hard look at their portfolios, it may
trigger a veritable garage sale of names that are failing to
impress Wall Street, including U.S. e-commerce rival Amazon.com
Inc, fund managers said.
"Any company that didn't meet expectations and give a rosy
outlook is probably being considered as a sale candidate to make
room for a name like this," said Jim O'Donnell, chief investment
officer of Forward, which has $5 billion in assets under
"There won't be wholesale turnovers of portfolios, but I
imagine Amazon is being looked at," he added.
Chinese rivals like Baidu Inc and Tencent Holdings
Ltd also may be pressured if fund managers view
Alibaba, which powers 80 percent of all online commerce in
China, as a better path to tap into growth in the world's
Next month's roadshow is likely to attract interest from a
wide range of funds, including those focused on emerging markets
and technology. Alibaba may garner a valuation of $200 billion
or more when it goes public, analysts say, which would make it
one of the 20 biggest companies listed in U.S. markets.
"It is the 8,000-pound gorilla coming for the stock market,"
Michael Reynal, portfolio manager at San Francisco-based RS
Investments, said of Alibaba.
How investors act also depends on whether they gain a
toehold in the highly anticipated IPO at all. One topic of
debate is how investors who are boxed out of the IPO will play
Yahoo Inc, which holds a 22.5 percent stake in Alibaba.
The U.S. web portal has struggled to reinvent its core
business, but has nonetheless seen its shares more than double
in the last two years on the strength of its Alibaba ties. Some
investors say Yahoo Inc could be sold to clear room for Alibaba.
By some measures, the company carries a high valuation, with its
enterprise value to sales ratio surpassing 90 percent of the
U.S. stock market, according to Starmine, a Thomson Reuters
On the flip side, investors boxed out of Alibaba's IPO could
snap up Yahoo to capitalize on the Chinese company's growth.
That argument could also help buoy shares in Softbank Corp
, which has a 34 percent stake in Alibaba.
"I bet a lot of people are playing Yahoo for Alibaba and
once the IPO is gone, they may exit Yahoo completely," said Paul
Meeks, senior analyst and portfolio manager of the $42 million
Sextant Growth Fund at Saturna Capital, which has $4 billion
assets under management.
"A lot of people know they're not going to get IPO shares,
so they hold Yahoo and Softbank," said Mark Yusko, who manages
$4.5 billion as CIO of Morgan Creek Capital Management and has
invested in Alibaba through private placements. "They want to
capture the IPO pop."
Alibaba's debut comes at a time of growing dissatisfaction
on Wall Street for Amazon's record of thin profits and heavy
spending on developing television shows and hardware initiatives
including aerial drones and smart phones.
The expected boom in e-commerce in China may also drive some
U.S.-based investors in Chinese search company Baidu toward
More than 60 funds hold Amazon, Yahoo and Baidu shares,
according to Lipper, a Thomson Reuters company, about 20 of
which are target-date funds from Wells Fargo and
AllianceBernstein, designed to favor more conservative
investments as an investor's retirement approaches.
Amazon shares have fallen about 17 percent so far this year,
while shares in rival eBay Inc, which also could be
sold in favor of the Chinese e-commerce company, has been flat
as the tech-heavy Nasdaq has risen almost 9 percent.
Amazon's operating margin over the last 12 months is about
0.8 percent while for eBay, margins are roughly 20 percent,
according to Thomson Reuters data. By contrast, Alibaba boasted
a 47.5 percent operating margin in fiscal year 2014, ending in
March, according to its IPO filing.
Still, some analysts say Amazon is not easily replaced by
Alibaba because of their relative geographic strengths.
"Amazon has a stranglehold on the U.S. market just as
Alibaba has a stranglehold on the Chinese market," said Daniel
Kurnos, analyst at Benchmark Co. "It will be hard for one to
penetrate the other."
In 2013, Alibaba handled more online transactions than
Amazon and eBay Inc and had 231 million active buyers, or the
equivalent of 17 percent of China's population.
By 2020, online retail sales in China are estimated to reach
$420 billion to $650 billion, as much as the United States,
Japanese, UK, German and French markets combined, according to a
recent analysis by McKinsey Global Institute.
(Reporting by Deepa Seetharaman in San Francisco and Ryan
Vlastelica in New York; Editing by Sonya Hepinstall)