Pre-IPO investing: It’s one of the biggest reasons the rich get richer while the rest of us rarely get a shot.
You may not know it, but the super wealthy always get opportunities to invest in potentially blockbuster companies before they get listed on a major stock exchange, get a massive boost to their stock price, and rake in billions from their initial public offering (IPO).
In July 2010, Facebook was worth $20 billion. A year later, it was over $30. In 2012, Facebook shares started their first day of public trading on the Nasdaq at $37 a share. Today, the stock goes for ~$110.
Clearly, those people that bought into Facebook early turned thousands into millions.
You may have heard similar stories about Uber, the ride-sharing company that’s challenging the taxi business all over the world. If you don’t know, Uber works through an app you can put on your smartphone. If you want to drive people around for money, the app will tell you where to pick someone up, and your share of the fare will get deposited in your bank account. If you need a ride, the app will bring you the nearest driver.
As you might expect, Uber wants to list its shares for the public with an IPO and cash in. Wealthy investors have been buying the private shares of stock ahead of the IPO. And the valuation of Uber has soared…
Uber has raised billions already. The last round of investment raised $2 billion and valued the company at $68 billion (that’s bigger than Ford). Here’s a chart that roughly tracks Uber’s growth compared to Ford and GM:
In early 2014, Uber was worth about $10 billion. By the end of that year, it was worth four times that, around $40 billion. Obviously, those early investors have made a lot of cash.
No Billions for You (or Me)
But here’s the thing: For the most part, these hugely profitable pre-IPO investments can only be made by “accredited investors.” An accredited investor is someone who has $1 million in assets or $200k in annual salary.
The thinking is that if you don’t have that much money, you need to be protected from losing it. And rich people can afford to take the loss.
Yeah, it’s pretty much total BS. It’s just another example of nanny-state policy that lessens individual freedoms under the guise of “protecting” you. There’s also an element of the rich keeping their pet cash cows off limits to the masses.
Just thinking about it gets me irritated. Why should any investment opportunity be off limits — basically illegal — to anyone?
Obviously, it shouldn’t be. So I want to tell you about an opportunity that you can easily get in on. This one probably won’t turn thousands into millions, but I think it’s got a pretty good chance of doubling your money in the next year or so…
The Biggest Internet Company Ever
Yesterday, private investors invested more money in one Internet company than ever before. This one round of pre-IPO investment raised $4.5 billion. That’s more cash at one time than Facebook ever raised. Or Uber. Or any of the other promising new companies that have come to market.
This new Internet company is called Ant Financial. It’s an online payment company in China. It has 450 million active users and processes 170 million transactions per day. That round of fund-raising yesterday valued Ant Financial at $60 billion, making it the second-largest private company in the world, behind Uber.
At some point, Ant Financial is going to go public with an IPO of its stock. It will likely happen this year. And there is an easy way you can get in on what will certainly be a pretty good IPO.
You see, Ant Financial was founded by another Chinese Internet giant, Alibaba (NYSE: BABA). If you don’t know, Alibaba is kind of like the Chinese Amazon.com. It’s an Internet retailer, and it also offers video services, as well as financial services through Ant Financial.
Now, Alibaba started trading here in the U.S. on the NYSE in September 2014 at around $93 a share. It’s just under $80 today. Yeah, it hasn’t done so well. And it’s because people don’t really trust Chinese companies, as I’ve written before.
I’ve changed my thinking on Alibaba. I think you should own this stock. Here’s why…
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Bullish on Alibaba
Before Alibaba went public, it spun off Ant Financial into a separate company. But Alibaba still owns about a third of Ant Financial. And Alibaba also currently receives about 37.5% of Ant Financial’s pre-tax earnings. So we could say that $22.5 billion of Alibaba’s valuation is Ant Financial.
Alibaba is currently valued at $189 billion. For comparison’s sake, Amazon is worth $285 billion. Yes, Alibaba is smaller than Amazon, but it has greater potential because it serves a bigger market — China. The scale that Alibaba operates on is bigger than even Amazon…
Alibaba is expected to do $100 billion in revenue this year. Amazon should hit $130 billion. But next year, Amazon will do around $155 billion, while Alibaba will do $130. In other words, Amazon will grow revenue at 19%, and Alibaba will grow better than 30%.
And Alibaba is cheap. Right now, it is trading with a forward P/E of 3.5.
3.5! Amazon’s forward P/E is nearly 70.
Alibaba also has a better debt situation. Amazon carries $19.8 billion in cash with $17.5 billion in debt. Alibaba has $18.5 billion in cash, but only about $9 billion in debt.
I can’t tell you for sure that Ant Financial will be the catalyst that will finally push Alibaba to a reasonable valuation. Though I will say that Ant Financial has great upside in a developing economy.
But I can tell you that a reasonable valuation for Alibaba is twice as high as it is now, maybe more. So I think you should own Alibaba. It’s very likely to be the biggest Internet company in the world in a couple years.
Until next time,
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.