Bottom line: Shares of Alibaba and JD.com will remain under pressure for the next few months from opportunistic short selling, but should rebound late this year due to strong growth prospects for their core e-commerce business.
Separate reports are spotlighting a recent short-selling spree targeting China’s 2 leading e-commerce companies, Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD), wiping out billions of dollars in market value over the last few weeks. But the negative sentiment also raises the question of whether there’s something systemically wrong with these companies and China’s e-commerce market in general, or whether this is a short-term phenomenon created by people looking to make some quick profits.
The answer to that question is probably somewhere in between the 2 extremes. There’s no question that Chinese e-commerce companies, and Chinese companies in general, are masters at inflating their sales and other financial figures through various forms of manipulation. Suspicion over that kind of manipulation is probably what prompted the US securities regulator to launch a probe into some of the accounting practices at Alibaba last month, which is one of the factors now weighing on its stock. (previous post)
JD doesn’t look too much better, since the company has never been profitable on a sustainable basis since its IPO in 2014. That fact didn’t seem to initially bother investors, who bid up the company’s stock to as much as double its IPO price in the first year after its trading debut. Alibaba’s shares followed a similar trajectory, rising as much as 75 percent over their IPO price in the first few months after their 2014 debut.
But shares of both companies have entered a new phase over the last year, with the stock of each now trading just around 10 percent above their IPO prices. That’s not a very impressive performance over 2 years, and the bears have begun taking advantage of the negative sentiment to try and earn some quick profits.
According to a Bloomberg report, bearish bets on Alibaba are now at a record high, peaking last week at 124 million shares. (English article) Leading the bearish group are famous short sellers including Jim Chanos and John Hempton, who have been betting against the company for months. In addition to the probe against Alibaba by the US Securities Exchange Commission (SEC), investors were also spooked by the recent sale of $10 billion worth of the company’s stock by Japan’s SoftBank, one of Alibaba’s oldest investors. (previous post)
Old Report Haunts JD
All that negative sentiment has put big pressure on Alibaba shares, which have lost about 7 percent of their value since the end of May. Meantime, JD shares have lost nearly 30 percent of their value over the last 2 months, including a 14 percent drop since the start of this month that some media reports are blaming on a short seller report that came out a while ago.
That report came from short seller Sid Choraria, whose APS Asset Management questioned the gross merchandise values (GMVs) in some of JD’s financial reports and also expressed a general lack of trust in the company’s management. (Chinese article) Choraria also doesn’t like the fact that JD has never been significantly profitable, and instead its loss widened to $141 million in its latest reporting quarter.
As I’ve noted previously, the kinds of accusations and suspicions being made against Alibaba and JD are quite common against Chinese companies in general. But Alibaba’s high profile, due to its large size and talkative founder Jack Ma, make it a particularly attractive target for this kind of short selling. JD’s founder Richard Liu is equally talkative and controversial, though his company’s much smaller size means he doesn’t usually attract much attention outside China.
All that said, I’m still quite bullish on e-commerce in China, which is rapidly claiming many of the nation’s young and poorly-run traditional retailers as victims. The lobby of my apartment building is constantly filled with e-commerce packages and deliverymen coming in and out, and just this past week the building management added a big locker-like contraption in the lobby to accommodate all the e-commerce deliveries.
Accordingly, I do think this bearish sentiment against Alibaba and JD is probably a short-lived, opportunistic phenomenon, being magnified by the recent spate of negative news. That means shares of both companies should ultimately recover and probably post some healthy gains after the negative sentiment subsides, though that may not happen until the fall or even end of the year.
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