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Gad: The Next Google-Like IPO

Stocks in this article: VGOOG

Editor's Note: This article was originally published at 2 p.m. EDT on Real Money on July 18. Sign up for a free trial of Real Money.

In my many years of investing, I have only participated in one initial public offering, or IPO. I was fortunate enough to pick up shares of Visa (V) in March of 2008. I got a small allocation but, more specifically, I was willing to buy shares on the first day of trading. Unfortunately for me, I sold a year later. Here we are today, and Visa shares are up nearly fourfold since then.

I stay away from IPOs for one simple reason: they are basically a lesson in Economics 101 with respect to supply and demand. When companies go public, they do so with the intent of seeking a maximum valuation -- not necessarily good news for value-seeking investors. IPOs come to market when the overall stock market is very optimistic and investment bankers are able to easily line up buyers. No surprise that the IPO market basically went extinct in the second half of 2008 and 2009.

According to a study I read by the University of Florida, 18 IPOs came to market in 2008, the lowest number since 1983, the starting point of the study. In the late 1990s, the market was averaging over 300 public offerings a year, with a record 575 in 1996. In 2013, the IPO market picked back up with 136 offerings. During the first three months of 2014, we have had 82 offerings, more than any quarter since 2000.

So if your goal as an investor is to invest at the lowest possible price, an IPO is typically not the best way to go.

However, in addition to Visa, there is one other company whose shares I did not buy after coming public that I wish I had, for very apparent reasons. That was Google (GOOG). Google was one of those rare companies that was a high-growth tech company but with a very reliable, tollbooth-like business model. To develop a search engine that basically earned a penny every time someone clicked a link is one of the most explosive business models ever.

Fast forward to today and a second -- and perhaps last -- Google-like opportunity is on the horizon later this year. I'm referring to Alibaba, China's version of Google and then some. Undoubtedly, Alibaba will very likely come public at the maximum valuation range. It won't be a Google-like Dutch auction process. Nonetheless, some are saying that Alibaba will seek a valuation of some $130 billion and could be worth over $200 billion on day one of trading. Google is worth $400 billion. Alibaba has a population of 1.1 billion people to cater to.

The latest is that Alibaba is slated to go public in September. Despite the fact that investors will likely pay a dear price, that price could actually be a fair one for a spectacular business.

At the time of publication, Gad had no positions in the stocks mentioned, although positions may change at any time.

Sham Gad is the managing partner of Gad Capital Management, a value-focused investment firm based in Athens, Ga. Gad has written extensively for The Motley Fool and was a securities analyst for UAS Asset Management, a small value investment fund in New York City, in 2007. From 2002-2005, Gad managed assets for the Gad Investment Group.

Additionally, Gad has just released a new book, The Business of Value Investing: Six Essential Elements to Buying Companies Like Warren Buffett. He earned his BBA and MBA at the University of Georgia. Gad appreciates your feedback; click here to send him an email.

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