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Should You Short Alibaba?

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A blog post about Alibaba and Chinese e-commerce companies more broadly by an accounting/auditing blogger has recently made its rounds on the internet. Most investors first became aware of it after is was shared on Twitter by Muddy Waters Research, an investment company specialized in revealing frauds and scams in Chinese companies and then taking short positions in the stock.

Muddy Waters is a highly respected firm that many traders follow for tips on possible shorts. The company has also made good money in the past by exposing inflated numbers and frauds in the stock market.

On the same day as Muddy Waters sent out the tweet, Barron’s picked up the story and later offered Alibaba to comment on it, but the company declined.

The blogger in the center of all of this, who says he prefers to remain anonymous, points to the sales figures released by Alibaba after the 11/11 shopping spree, aka Single’s Day in China, as ridiculous and too good to be true. For example, he mentions that Alibaba’s sales for just this one day came in a little over K-mart or Sears’ total annual revenue.

Alibaba vs. Amazon

The best comparison to make to get the numbers in perspective, however, is Amazon. So, let’s take a look at how Amazon’s numbers compare to Alibaba’s so you can make up your own mind on whether you believe them or not:

  • Alibaba Single’s Day revenue (1 day!): US$25 billion
  • Amazon 2016 Q4 revenue (91 days): US$43.7 billion

In other words, Alibaba in just one day sold a little more than half of what Amazon (including AWS) sold in all of Q4 2016.

The blog author, along with Muddy Waters and various people on Twitter, are mocking these numbers and Alibaba by pointing to Alibaba’s logistics system in China as incapable of delivering packages at this scale.

Anyone who has spent some time in Chinese cities have seen how packages are sorted on sidewalks in seemingly random locations around town.

Or as the author puts it, “why invest in all that expensive GPS, scanning, package, tracking automation when you can just dump your packages on the sidewalk and let homeless people figure out how to get them where they are supposed to go?”

Still, most people who have spent time in China would also agree that this seemingly chaotic system in fact works incredibly well, packages rarely get lost, and delivery is unbelievably fast.

Those who know China also know how huge online shopping really is here, not to mention on days like 11/11. Thanks to extremely low shipping fees, fast delivery, and easy-to-use shopping apps for smartphones, online shopping is much bigger in China than in any Western market like the US or Europe. According to available statistics figures, 20% of Chinese retail is online compared to 9.1% in the US.

Also, keep in mind that Alibaba is a massive company, with much more than just Alibaba.com as part of its business. For example, Taobao.com is the number 1 e-commerce platform in China, connecting shoppers with independent sellers. Tmall.com is also a huge player, but is more focused on sales from well-established businesses and brands. Take a look at the full picture below:

Alibaba businesses

Alibaba’s organizational structure is a mess

While I am skeptical of the notion that all of Alibaba’s numbers are somehow made up, the same blogger deserves credit for pointing out some interesting things about the company’s organizational structure in another post on his blog.

Their structure is, to put it mildly, a huge mess. Take a look for yourself in the chart below:

Alibaba organizational structure

Perhaps the most interesting thing about this is the footnote to the chart not shown here. According to the footnote found on the SEC website, there are approximately 120 entities incorporated in China and other countries + about 200 subsidiaries and consolidated entities that are not included in the chart.

One can easily argue that the only possible reason for structuring a company as a labyrinth at this level is to make it effectively un-auditable and eliminate any risk for Jack Ma himself and other key people in the company.

Also, investors should really ask themselves what type of ownership claim they have on Alibaba’s business when buying shares in the Cayman Islands holding company, which what is traded on Wall Street. It is very unclear what, if any, ownership claim they have on the real-world business that Alibaba conducts from its Hangzhou, China headquarters.

As a final point, it also remains unclear who actually audits Alibaba. Officially it is audited by PwC Hong Kong, but the reality may be different. Most likely, Alibaba is audited by PwC on the mainland, and signed off by their colleagues in Hong Kong, who are operating under a completely different set of rules.

To summarize:

  • Alibaba has lots of brand names operating under its umbrella, some in China and some globally.
  • 20% of Chinese retail is online vs. 9% in the US.
  • China’s online population is 751 million people vs. 287 million in the US.
  • Alibaba’s shares traded in the US is for a Cayman Islands holding company, with unclear connections to the real-world business operations in Hangzhou.
  • We know very few details about how Alibaba is audited.

Should you short Alibaba?

My simple answer at this time is still no. While their revenue figures seem extremely high, I don’t necessarily think they are inflated. Other aspects of their business, such as the corporate structure and auditing issue, seem more questionable to me.

Alibaba chart

The stock has gained about 100% so far in 2017, and with momentum like that, shorting can be dangerous. However, if we see clear signs of a slow-down in the Chinese economy going into 2018, Alibaba would be high on my list of potential stocks to sell short.

The next few days will tell us if the recent uptrend in the price will be maintained, or if the price will break down below the trend line. If a break-down does happen, an opportunity to short may present itself even sooner.

Keep a close eye on Alibaba’s stock price in the first few weeks of December for confirmation of where the market is going.

Featured image from Pixabay.

Disclaimer: The author does not hold any positions in Alibaba or related companies.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 37 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Stock Pick: Philip Morris

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Philip Morris International Incorporated is an American multinational firm that manufactures cigarettes and tobacco. Its products including its best-seller Marlboro cigarettes that are sold in over 180 countries around the world. The company has a diverse workforce of over 81,000 employees and touts an estimated 150 million consumers worldwide. In 2017, Philip Morris generated 7.8 billion dollars in revenues.

Technical Analysis of Philip Morris (PM)

PM looked toppish in June 2017 when it failed to take out resistance of $120 after two attempts. On top of that, the stock was trading in extreme overbought territory on the weekly chart. These were indications that bulls were exhausted.

Things went from bad to worse when the stock breached support of $110. This activated the head and shoulders reversal pattern on the daily chart and effectively reversed the trend. The downtrend saw PM drop to as low as $76.21 in June 2018. However, it appears that the worst may be over for the stock.

Technical analysis show that PM is respecting key support of $78. Bulls have defended this level since February 2012. It looks like they will continue to take control of this price level, especially after PM successfully backtested the support in August 2018.

In addition, we can see the weekly RSI breakout from its own falling wedge pattern. This is an indication that bulls are significantly gaining momentum.

Fundamental Analysis of Philip Morris (PM)

In addition, we have fundamental analysis to back up our bullish view. PM’s trailing twelve month price to earnings ratio stands at 19.78. The stock is still relatively undervalued considering that it has a five-year maximum of 28.51. This suggests that investors are generally willing to pay more for PM stocks.

On top of that, Zacks reports that Philip Morris beat expert projections for the second quarter of 2018. Analysts estimated that PM would generate revenues of $7.528 million and an earnings per share (EPS) of $1.23. However, PM brought in revenues of $7.726 million and an EPS of $1.41. With these developments, even the Wall Street Journal is overweight on the stock as they published a target price of $93.27.

The strategy is to buy as close to $78 support as possible. If bulls can successfully defend the support, then PM might be able to rally to our target of $95.

The timeline for the target is less than six months.

Weekly PM Chart

Monthly PM Chart

As of this writing, the Philip Morris International Incorporated stock (PM) is trading at 81.93.

Summary of Strategy

Buy: As close to 78 support as possible.

Target: 95

Stop: Close below 76.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.6 stars on average, based on 236 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Analysis

NIO Means Tesla Monopoly Ends

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

On Sep 12, NIO made its IPO on the NYSE, which is a very important event for all automotive investors. Founded in 2014 by William Lee, NIO is one of the first companies to compete with Tesla in the premium electric car segment. NIO is based in Shanghai, China, and it already got investment support from such renowned companies as Baidu, Lenovo, Temasek, Tencent, Sequoia, and others.

There are currently over 4,000 employees at NIO.

In June 2018, the company started selling NIO ES8; currently, 481 electric cars have been sold and 17,000 more have been pre-ordered. This is Tesla Model X’s direct competition, while its price is twice as low thanks to some good support from the Chinese government, which is interested in promoting electric cars.

NIO ES8 starts from $67,000 (basic configuration). It has two engines of 635 horsepowers and can ride 355 km before charging. A good difference from Tesla is an option to use replaceable batteries; the monthly subscription is $193, and it takes just around 3 minutes to replace a battery. Tesla planned to offer this option, too, but did not implement it.

The underwriters of NIO at NYSE were BofA Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, and UBS. The initial price per share was $6.26. During the first day, 160M of shares were sold, which allowed NIO to get around $1B and get a place in top US IPO’s rating in 2018.

During the first day, the share price increased to $7, while the next day it jumped above $13, allowing investors to make over 100% profit. This shows investors are very much interested in the company, perhaps because of the good pre-IPO promotion. Before buying NIO shares now, though, one should wait first for the volatility to calm down.

Comparing Tesla and NIO is not the best job now, as Tesla already has over 14-year experience; however, this comparison may well become valid in a year or two, when more data arrive. While NIO is just starting out, its management may make accidental mistakes.

The lockup period (the period during which investors are not allowed to sell their shares) is 180d, which may additionally support the price, while after that the Q2 results will come out. Among NIO’s advantages, one may name government support as one of the biggest. While the trade war between the US and China is here to stay, the demand is high, and company may cater to Chinese customers first. When it starts conquering the US market, though, the conflict may have already come to an end. The company also admits that the customs duties may indirectly influence the car prices.

The issues NIO might face are already known, and the most obvious one is that of meeting the demand. Over the first 6 months of 2018, NIO had a loss of $502M, while the profit earned afterwards is currently just $7M.

Another risk is in the news that Tesla has come to an agreement with Shanghai authorities to build a car factory in the city, which means high competition for NIO. Still, NIO is likely to win thanks to the price, as the parts for Tesla are produced in the US only, and they are subject to customs duties.

NIO management also announced they had had no mass electric car production experience before, and this may have negative influence on the company growth – an issue already overcome by Tesla. Finally, for ES8, there are around 1,700 used coming from 160 vendors; with so many suppliers, delays in shipments may become quite a common thing.

Many things depend on how NIO is going to rise its production volume and how true the declarations of the management are. Previously, we’ve seen how Elon Musk’s words were sometimes very different from what happened in fact.

One of the key topics here is financing, as the development will require a lot of money. Even Tesla has failed to book net profits so far, its losses and debts still growing.

NIO shares are likely to rise in the short term, as investors will be playing on the fact the company is quite promising at first sight. Other conclusions may be only made after there are at least some financial data at hand.

Technically, there are two support levels for NIO: one at $7 and another at $9.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboForex shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 7 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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Analysis

TEVA: The Time Has Come

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

The bull market has made it harder to earn good profits on the share prices of industry leaders. Prices are already high, and the correction may begin at any moment. Day by day, the rumors about crisis spread , and such a crisis is usually expected in the Fall, which is confirmed with the latest 20-year history. Case in point: the dotcom crisis started in early September 2000, with the market reaching its bottom only two years later.

Another fall started in mid Sep 2007, and turned into the global crisis in Aug 2008. Still, the market reached its lowest low and started recovering sooner, in 2009. At the same time, some players are still living the past and waiting for the market to collapse everyday, without noticing the considerable gains that have been made over the years.

There were 7 years between the dotcom and the financial crises. The next major decline occurred in August 2015 but it was short lived and did not result in a major crisis. In 3 years more, Trump became the US president and started resolving the negative trade balance issue by imposing customs duties on China. This, together with tax reforms, supported the markets a lot, and they went on growing. However, the situation is rather tense now, and the fall coming alone may lead to the investors being rather worried. The companies hit their earnings historical highs every quarter, and this may make the management feel dizzy.

Still, there are companies that, unlike most of their counterparts, did not grow following the Trump election. One of them is Teva Pharmaceutical Industries Limited (NYSE: TEVA). When the market started growing after the US elections, TEVA started going down heavily, eventually losing over 80% during 2 years. The company started having problems in 2016 when they bought Allergan (NYSE: AGN) at $40.5B. Before that, TEVA capital had been growing steadily since 2006, while the debts had been at the minimum.

Once TEVA acquired Allergan, the debt went sharply higher, which provoked a selloff immediately. At the same time, the earnings also started falling.

Even the quarterly earnings in 2016 were not enough for investors, as the stock price first did not move much, and then hit the support at $50.00 in the middle of the year and went further down.

The outlook is disappointing, and one would never even think about trading this stock, but still there are some things one should consider well.

Many years ago, many people lived in the countryside or at least used to spend some time there, and few heard of such a thing as an allergy. Then, however, people start migrating to cities, which are very polluted. This, perhaps, led to allergies being quite widespread nowadays. Allergies can be quite dangerous, as in many cases it may provoke an allergic shock, with the patient literally hanging between life and death. In this case, the only thing they need is a medicine that will help them survive before the ambulance arrives.

This is exactly what Teva Pharmaceutical Industries Limited created EpiPen, a medicine that removes allergic shock caused by insect bites, food, other medicines, or physical activity. An injection of EpiPen is enough to stimulate the cardiovascular system and the respiration organs, which prevents the consequences of an allergic shock.

According to some sources, in the US, there are around 43M people who may suffer from allergic shock any minute and should have such a medicine at hand. Ideally, such a person has got to have 2 doses of EpiPen, as sometimes one may be not enough. These two doses cost around $375, while the competition are trying to create the same medicine using adrenaline that should make it much cheaper. Still, they are having problems with medical tests, which means EpiPen has no competition right now. Another point is that it should be used within 12 months; otherwise, you will have to buy another dose. This brings stable profits, the ethical aspect is taken away.

Teva Pharmaceutical Industries Limited is a multinational company with 66 plants in 60 countries. This is one of the biggest pharma companies out there, and it’s no wonder that Warren Buffett has paid attention to it. In Q2, Berkshire Hathaway increased its stake of TEVA shares to 4.3%, or 2,7M shares, and is now one of the top three shareholders.

Meanwhile, in November 2017, a new CEO came to TEVA. Kare Schultz reduced costs drastically, and, as a result, the debt stopped growing first, and then was reduced by over $10B.

Technically, the downtrend is finishing, and an uptrend may start in the midterm, with the support being located at $20.00.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboForex shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 7 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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