Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

You've got to feel for all those Alibaba bears. For quite a while now, skeptics have been ringing alarm bells over the Chinese internet company's accounting. Essentially, their concerns could be summarized as: The numbers look too good to be true.

Investors haven't been listening. Playing a role as one of the chief Cassandras in this drama has been Anne Stevenson-Yang, the co-founder of J Capital Research.

"I would like to be able to believe in the dream, but I'm afraid every time they come out with a report it just seems like, you know, 'come on guys'," Stevenson-Yang told CNBC earlier this month.

Stevenson-Yang has questioned Alibaba's 39 percent revenue growth, which she says looks out of sync with reality for a company of that size. If no one else is growing so fast, and Alibaba is a platform for other merchants, then it's questionable how the company itself can hit that mark. Meanwhile, gross merchandise value, a number that e-commerce companies cite to explain how much transaction traffic is flowing through their pipes, "doesn't pass the smell test," she says.

Stevenson-Yang isn't playing solo. Back in November, CNBC reported that hedge fund manager Jim Chanos was shorting the stock due to "accounting concerns." Earlier this month, Chanos publicly stated he's still betting against Alibaba and is long JD.com, a rival Chinese e-commerce company. Bronte Capital is among other hedge funds to have questioned Alibaba's numbers.

Chanos's bet doesn't look to have worked out too well, at least until now. Between the time of those two reports on his short call, Alibaba stock fell just 5.7 percent.  In the same period, the S&P 500 lost 2.3 percent and the Nasdaq dropped more than 8 percent.

Short Shrift
Hedge fund manager Jim Chanos said in November he was betting against Alibaba, and again in May
Source: Bloomberg, information from CNBC

Bill Ackman may feel a pang of recognition. He bet $1 billion against Herbalife, calling it a pyramid scheme and saying back in 2012 that it was the  "highest conviction I've ever had about any investment I've ever made." But in the murky business of short selling, vindication (of sorts) isn't necessarily the same as winning. While Ackman was victorious in his battle to get Herbalife investigated by the Federal Trade Commission, the company's stock has weathered the storm.

That precedent should strike a cautionary note for any short-sellers tempted to celebrate the news that the SEC is investigating Alibaba, which sent the stock down 6.8 percent in the U.S. on Wednesday. Alibaba said it's cooperating with the regulator and that the probe doesn't indicate it has violated any securities laws.

Part of the challenge for the shorts is that the allegations aren't new. Barrons, for example, did a deep dive on Jack Ma's company in September under the headline "Alibaba: Why it Could Fall 50% Further." It was an impressive piece, with Jonathan R. Laing laying out both the macro and micro problems facing the company.

Not Interested
Bearish bets on Alibaba's stock have been dropping
Source: Bloomberg; Markit

Beyond the facts of China's economic slowdown and growing competition, Laing poked a stick at "the seeming improbability of the growth numbers reported by the company" over the three fiscal years ending in March 2015 and said that a string of acquisitions -- from media and entertainment, to logistics and cloud computing -- "seem aimed more at beguiling investors than improving earnings."

Investors do indeed seem beguiled. Alibaba was trading at about $64 when Laing  laid out his argument for a 50 percent decline. The stock has since moved in the opposite direction. After Wednesday's slump, it closed at $75.59.

What Investigation?
The yield on Alibaba's most liquid bonds rose a mere 3 basis points after the company said the SEC had inquired about its accounting
Source: Bloomberg

Judging by both a decline in short interest and the benign reaction of Alibaba's bond yields to the SEC probe, investors are still buying the company's story. Their view could be broadly stated as: Irrespective of any (yet to be proved) accounting irregularities, this remains a large and growing business that's well positioned to benefit from China's rising middle class and its commanding presence in e-commerce.

Cassandra was a tragic Greek character gifted with prophecy but cursed never to be believed. In these humbling times for the industry, she'd have fitted in as a hedge fund manager.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. If or when Chanos actually took positions is unclear.

To contact the authors of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net