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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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Analysis

Traders Buying Activision Blizzard Options

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

With the S&P 500 having recovered most of its Christmas losses, there are still stocks that have not even started to move away from their lows. Today we are going to analyze one of those.

Activision Blizzard (NASDAQ: ATVI) is a US based company that produces and sells game consoles, PC and mobile gaming content. Headquartered in Santa Monica, CA, ATVI is one of the largest gaming and entertainment companies in the world. It was founded in 2008 after the Vivendi Games and Activision merger, and currently owns such brands as Call of Duty, Quake, and World of Warcraft, among others.

In the last 6 months of 2018 ATVI experienced its most negative period in history, having lost around 50%.

Fundamentally, this was sudden, as all quarterly reports exceeded expectations.

The chart shows revenue went down in early 2018, but this is okay given the seasonal factor, and Q4 is sure to yield nice profits to ATVI.

With the reports being so good, then, what made the stock plunge so much? First, the market went down overall, but there were some other reasons, too. One of them is the lower expectations on Q4 2018 earnings. They were first forecast at $3.06B, but in November, the company lowered them down to $3.04. Another reason was the news of fewer users in Q3.

Then, four top managers got fired, including the CEO and president, as they were unable to create a new game during 2018; this was followed by Michael Morhaime, the former Blizzard CEO, leaving the company. He stopped being president in October and became an adviser, but he will definitely have left by April 2019.

Done with firing? Not really. In February, someone let slip the company is getting ready for a massive job cut, firing over 100 employees, in order to reduce costs.

Breaking off with Bungie added fuel to the fire, with the stock plunging by 7%. Activision Blizzard and Bungie worked together on Destiny, but this did not prove fruitful. In November, Activision Blizzard provided Destiny 2 for free just to ramp up the number of users, which means the sales were not very good. At Bungie, however, people reacted positively, as they were very happy to get rid of the strict Activision Blizzard schedule.

For ATVI, however, this not only caused the stock to plunge, it may have also led to trials initiated by investors. A few companies are already considering legal action because of the loss of potential profits. All these negative reasons are still keeping the stock near its lows. The reasons are already priced in the market, though, as the news on legal actions were known in January, while the firing campaign may be good for the company.

In December, we mentioned General Motors (NYSE: GM), where the management decided to cut jobs, and the stock went finally up, forming an uptrend.

Once Activision Blizzard is able to reduce costs, this may happen to this company as well. The market is expecting a positive Q4 report, which may change investor sentiment, which is now negative.

The P/E is currently at 17.54, with the average being 18.91, which means the stock does have some potential.

With such a large stock fall, the short float is quite low, 2.23%, meaning there are few people who want to capitalize on the fall.

Another important factor that may signal a rise is the news on buying 16,000 call options at $46, with the expiry on Feb 15. Traders have to pay a premium in order to buy options, and the price must rise above the strike ($46 in this case) for them to get profits; this means the price is very much expected to rise above $46 by Friday.

Technically, there is a descending trend, with the price being below the 200-day SMA. Once the price approaches $45, however, the volumes go up, which shows the traders’ interest.

A good report may well push the stock above $50, but the price should stay there for a while before one could start taking midterm longs. The target may be at around $65 or $70.

Those who bought calls hoped for a good report, but the options will expire in a couple of days (or sooner), and this support will come to an end. In order to understand whether one should continue holding longs on ATVI, one should monitor the number of new users and management speeches. The rising number of users may change the current negative trend, and, in this case, even the legal actions won’t be a big deal.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets 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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4.7 stars on average, based on 30 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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Stock Pick: Foot Locker Inc. (FL)

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Foot Locker Inc. (FL) is an American retailer of apparel and shoes. The company operates 3,270 stores in 27 countries in North America, Europe, and Asia. These stores come in various formats, including Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02. As of January 2019, the company has 15,141 employees.

Technical Analysis of Foot Locker Inc. (FL)

We like FL because it is one of the few S&P 500 stocks that has gone through a major correction and is now showing signs of reversal. After printing an all-time high of $79.43 in December 2016, the stock showed signs of bullish exhaustion. The combination of bearish divergence and a double top pattern was enough to drive FL to as low as $28.42 in November 2017.

From that point, the stock bottomed out and started its reversal process. Over a year later, we believe that FL might have reversed its trend.

Technical analysis shows that FL has breached resistance of $52 in May 2018. This triggered the breakout from the inverse head and shoulders pattern on the weekly chart. While the stock pulled back and went below $52 in July 2018, the stock remained bullish. After all, it printed a higher low setup of $44.47 in October 2018.

With a higher low in place, FL once again took out resistance of $52 and climbed as high as $58.67 this month. Now, the stock is facing resistance at the 200 moving average on the weekly chart. The expected pullback will likely send FL down to $52 and flip the resistance into support.

Fundamental Analysis of Foot Locker Inc (FL)

In addition to our technical analysis, fundamental analysis also backs our bullish view.

The third-quarter 2018 performance of Foot Locker Inc. beat analyst estimates. Analysts projected that FL will print sales of $1,846 million yet the company generated total sales of $1,860 million. Also, analysts projected earnings per share of 92 cents. However, the company came out with surprising quarterly earnings of 95 cents per share.

Lastly, the trailing twelve months price-to-earnings ratio (PE ratio TTM) of FL is 12.85. The stock is undervalued considering that the PE ratio TTM of the apparel and shoes industry is 14.42. On the surface, the difference might not be significant. However, if you take into account that the four-year maximum of FL is 19.13, then it becomes more apparent that the stock has more room to grow.

The strategy is to be patient and buy on dips as close to $52 as possible. As long as bulls hold this level, FL will likely generate the momentum to bounce to our target of $72. Take that out and the next target is $78.

The timeline for the target is more than six months.

Weekly FL Chart


Monthly FL Chart

As of this writing, the Foot Locker Inc stock (FL) is trading at $56.68.

Summary of Strategy

Buy: On dips as close to $52 as possible.

Targets:  $72 and $78.

Stop: Close below $49.50.

 

Featured image courtesy of Shutterstock.

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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3.9 stars on average, based on 328 rated postsKiril is a CFA Charterholder and financial professional with 5+ 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 funds, as he does his own crypto research and is a Product Manager at Mitre Media. 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

High Risk, High Yield

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

After Donald Trump became President he told investors it was he who made the stock market rise. When the market went down, however, most blamed Trump again.

In 2018, the indices reached their highs and started correcting, which meant the ascending trend faded out and the market needed a new driver to start going up again. The US is taking on a new election in 2020, and until then Trump has to create that driver for the market in order to win it. And indeed, he does have a few silver bullets to support the national economy.

The Sino-US trade wars were unable to stop the market rise at once, but sped up the reach of the highs. With the ceasefire achieved, the market went positive, as the customs duties finally started spoiling companies’ earning reports.

The tech companies were the first to suffer. Thus, Apple reported iPhone sales declines, which according to Tim Cook, happened because of the trade war.

If the US-China relations improve in the nearest future, this will help the stock market to rise again – a good move for Donald Trump. While imposing duties was quite quick, lifting them will surely require a lot of time; this will push news on various agreements between the US and China into the market, and that will help  prices to start rallying again.

With the tech segment suffering most of all, it would be reasonable to assume its rising potential is also quite high.

Among the techs, Apple is of course in focus, as it’s a leading company here. Previously, iPhone sales decline could be explained with the trade wars, but now there’s also Qualcomm that, through legal actions, managed to ban selling iPhone products in China and Germany because of patent infringements. Apple, however, is still selling iPhones in China, even at risk that its representatives may get arrested. This is why Q1 report may fall behind the expectations, and the stock may get pushed down again. The price may fall to $140, and only positive news on Qualcomm claims may change the situation to the better.

Apart from Apple, the tech sector has a lot of companies, and each of them may react differently to the improving Sino-US relations. The corporations where most revenues come from China are first to win, of course.

One of such is Skyworks Solutions (NASDAQ: SWKS), which produces mobile network components. 83% of SWKS revenue comes from China. Its P/E is 9.70, while the average figure in the tech sector is 26.30, meaning Skyworks is very much underpriced. If the US and China come to an agreement, this company is very likely to increase its revenue and get investors’ attention. Ironically, the major risk is again Apple, as this company’s orders constitute around 40% of Skyworks revenue. If, however, Apple sales are able to start rising again, Skyworks will benefit from both factors.

Whenever the price breaks out of $70 and stays above, the price could rise further to $90.

Broadcom (NASDAQ: AVGO) has over 54% of the revenue coming from China. It is an integration microchip producer that is among top 20 semiconductor selling companies. It’s P/E is 12.60%, slightly higher than that of Skyworks Solutions, but still far behind the 26.30 average.

Broadcom also depends from Apple’s orders, but its share is just 20%, so the risks are lower. Still, a slight decline in revenues is expected in Q1.

Broadcom’s outlook is overall better than that of Skyworks. Technically, the price is above the 200-day SMA, and there’s an uptrend forming. When the entire market was falling at Xmas, Broadcom barely reacted, which signals the positive investor sentiment.

Once the price goes above $270, the stock may then rise to $300.

One of the most underpriced tech companies is Micron (NASDAQ: MU), another semiconductor producer that mainly makes RAM modules, SSD drives and CMOS detectors.

It’s ‘Chinese’ share is 51%, while the P/E is at 2.90, compared to 26.30 average. Over the last six months, the earnings reports showed the highest revenue, while the stock price was going down, just because of the RAM and flash drive supply and demand imbalance. The market is still oversupplied with these devices, and Micron is expected to lose revenues for the following two quarters as well. In Q4 2018, the earnings already fell by 6% QoQ.

Considering the above, Micron decided to increase its production by only 15% instead of 20%, as planned before, which will allow it to decrease the supply. Samsung is also planning to decrease its memory card production in order to slow down the price fall. By Q3 2019, the demand for memory devices is expected to rise again, and the price should recover.

The financial market is all about expectations, and, in this case, the decrease of memory devices demand is already priced, this is why Micron stock have fallen by 50% for the last six months. The current price may prove to be the best for going long.

When $34 got broken out, the volume increased sharply, which is the first sign of the reversal. The stock is currently trading above $36, and in case it stays there, it may go as high as $50 per share.

Each of the above companies is facing some issues, which are bound to get resolved sooner or later. Still, all of them have the same problem: the Sino-US trade war that prevents them for recovering and rising. Once the relations between the two countries get better, the game is sure to change a lot.

The key risk factor here is Donald Trump being very unpredictable. However, the potential yield is quite high, too.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets 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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4.7 stars on average, based on 30 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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