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Oct 21, 2016

S3 BLACKLIGHT: Alibaba’s Yin & Yang - Both a Long & Short Favorite

Chinese e-commerce giant Alibaba Group Holding Ltd. (BABA US) is up 27% for the year at $103.30 and nearing its historical high of $109.36. The company reported stellar 1st quarter 2017 fiscal results where it beat EPS and revenue estimates handily and its secondary businesses of digital media and cloud computing are beginning to contribute a greater percentage to gross revenues as its footprint expands.

With Alibaba expanding its product lines successfully and actually buying back stock ($400 million from Softbank) and keeping debt relatively low compared to cash on hand ($9 billion vs. $18 billion) it is surprising to see short interest increasing at the same time. Alibaba short interest has increased 52% this year, with most of the new short activity occurring in the 3rd and 4th quarters

Alibaba short interest averaged $5.2 billion in 2015, ending the year at $7.8 billion, and traded between $6.0 billion and $7.7 billion in the 1st and 2nd quarters of 2016. Alibaba short interest hit its historical high at the end of September at $12.9 billion but has pulled back $1.1 billion, down 9%, to $11.8 billion as of today.

Short sellers remain pessimistic about the Chinese economy in general, especially the real estate and banking sectors, and Alibaba’s accounting and operations specifically. Notwithstanding Mike Evan’s, Alibaba’s president, statements that China is not in a bubble the macroeconomic negative overhang has only added to short seller’s conviction, like Kynikos Associate’s Jim Chanos, that Alibaba’s “questionable accounting” and use of off-balance sheet entities to divert delivery operation expenses brings into question the validity of the firm’s reported financials. Additionally, Chanos is also wary of Alibaba’s continued acquisitions and balance sheet expansion in relation to its potential revenue growth fearing that a downturn in China’s economy and resulting drop in consumer demand would put Alibaba in a precarious cash flow situation.

As Alibaba’s stock price continues to tick upwards behind strong buy-side demand, with occasional reversals as short sellers continue to sell into the rally we are seeing a classic yin & yang standoff where the shorts, the yin or “shady-side”, and the longs, the yang or “sunny side”, are complementary and interdependent until an outside event, such as the Chinese economy, throws this duality out of balance.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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