Should You Short Alibaba?
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’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:
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.
- 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.
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.