The stock price of Alibaba Group Holding (NYSE:BABA) is expected to decline significantly, according to one of the short-sellers who has been raising concerns about its accounting practices since last year.
Earlier this week, Alibaba Group revealed in a regulatory filing that the U.S. Securities and Exchange Commission (SEC) opened an investigation to find out whether its accounting practices violated federal laws.
According to the company, the regulator requested information related to the consolation policies and accounting of Cainiao Network as an equity method investee. Cainiao is the logistics business unit of Alibaba Group, which handles 70% of the express packages in China.
The SEC also requested information regarding its annual Singles Day sales event, which is considered the biggest shopping festival worldwide. The company said it is cooperating with the regulator.
Alibaba has questionable accounts
John Hempton, the chief investment officer of Bronte Capital told Reuters in an e-mailed statement that Alibaba Group is a “real company” but “with “questionable accounts.” Hempton also said, “The ability to value it from the accounts is, thus tricky.”
The short-seller believes that the stock price of the Chinese e-commerce giant will eventually “go down a lot and get a takeover bid.” Currently, Alibaba Group has a market cap of around $206 billion based on data from Google Finance, which means a buyer needs to have deep pockets to acquire the company.
The shares of Alibaba Group recovered from a decline of nearly 7% on Wednesday. The stock price of the company climbed more than 3.65% to $78.35 per share yesterday, and it is trading around $80.78 per share, up 3.11% at the time of this writing around 12:18 in the afternoon in New York on Friday.
Short interest on Alibaba shares
Reuters noted that the short interest on Alibaba shares doubled during the second half of 2015 from less than 50 million shares in June to as much as 98.1 million early in January this year.
Based on the recent bi-monthly data from the New York Stock Exchange (NYSE), the short interest declined to 77.5 million shares, which accounts 10% of Alibaba Group’s free float.
In a note to investors, Deutsche Bank commented, “While we would never be dismissive of an SEC inquiry, we believe that investigations are sometimes launched because the SEC is unfamiliar with various business models.”
Brad Lamensdorf, a portfolio manager at AdvisorShares Ranger Equity Bear ETF said they shorted the shares of Alibaba Group six weeks ago. They are expecting the stock to decline below $60 a share. He added that he didn’t buy back any shares on Wednesday, and he is sticking with his position that the stock drop further.
According to him, “Its business is very convoluted, there’s a lot of stuff that has not been disclosed properly, and it trades at a ridiculous multiple.”
In November, Jim Chanos, the founder and president of Kynikos Associates, said,
“We are skeptical on BABA’s prospects as China e‐commerce is maturing, while BABA’s market share is already very high. Free Cash Flow is being sapped by increasing acquisitions and equity investments into opaque entities.”
Earlier this month, Chanos said he is still betting against the Chinese e-commerce giant citing the reason that he has “real question” about its cash flow and financial metrics.
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