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Feb 1, 2018

S3 Analytics: Alibaba Shorts up $1.53 billion As Stock Falls 5.9%

Alibaba Group Holding Ltd. (BABA) reported strong 3rd quarter results with revenues up 56% to 83.03 billion Yuan and net income up 34% to 24.07 billion Yuan. Earnings rose 25% to $1.63/share, but unlike revenues and net income, were slightly below analyst’s expectations according to Thomson Reuters.   The Chinese internet e-commerce giant also stated that it is buying a 33% stake in its payment affiliate Ant Financial.

Alibaba’s stock price reacted negatively on the results, down 5.9%, or -$12.07, in late trading. Alibaba is currently the largest equity short worldwide with short interest of $25.9 billion. It is followed by another Chinese company, Ping An Insurance (2318 HK) at $16.3 billion and U.S. carmaker Tesla Inc. (TSLA) at $10.7 billion.

Alibaba’s stock price has been rallying since early 2016 but short sellers have continued to increase exposure to the stock as both an outright Alpha bet on an “overheated” stock and a Beta bet on an “overheated” Chinese economy. Alibaba’s short interest increased 19% in 2018, increasing $3.99 billion in January prior to its earnings release.

Since 2016, Alibaba short sellers are down $15.7 billion in mark-to-market losses but short exposure has more than tripled in just over two years. Short sellers are either convinced that rivals such as Tencent Holdings (700 HK) and Baidu Inc. ADR (BIDU) will challenge their dominance in China and Amazon.com (AMZN) will challenge them worldwide.

Short interest in Alibaba is $25.9 billion and the $12.07 price drop on 126.8 million short shares made $1.53 billion in daily mark-to-market profits today. Today’s profits covered just over a quarter of this year’s mark-to-market losses, Alibaba shorts are now down only $3.9 billion in 2018.

Increased Alibaba short selling prior to its earning release highlighted the bearish sentiment, the second chart above shows other Chinese stocks with over $100 million in short interest releasing earning in February.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
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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