Tech

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

Alibaba sentiment has never been this high. Since listing in the U.S. more than two years ago, hedge funds are more confident than ever in their assessment of the Chinese e-commerce giant.

But it's not the stock price that's up, it's short interest. And the conclusion of hedgies and shorts is clear: Alibaba Group Holding Ltd. is set to fall. Not surprisingly, the sell-side disagrees, giving it a 40-to-0 buy-to-sell ratio, with five fence sitters.

Get Shorty
Bets against Alibaba's stock have risen steadily since May
Source: Bloomberg

While margins may be hurt by the consolidation of video-streaming service Youku and South East Asian e-commerce provider Lazada, as well as spending on new projects, growth should "remain solid," JPMorgan Chase & Co. wrote before Alibaba released its earnings on Wednesday. Robert W. Baird & Co. also thinks Alibaba's fundamental growth trends are intact and actually advises investors to buy on earnings-related weakness.

Loyalty
Sell-side analysts have continued to rate Alibaba a buy through the good times and the bad
Source: Bloomberg
Note: Data tracks percentage of analysts holding each rating out of total recommendations tracked by Bloomberg


Such weakness was somewhat obscured by the September quarter report, which showed that sales barely beat expectations while net income exceeded estimates. Unsurprisingly, the knee-jerk reaction was for shares to spike in premarket trading despite the fact that operating income missed estimates.

Elsewhere in the earnings release, there were indicators of concern for those who were looking. Annual active buyers climbed just 1 percent from the previous quarter, mobile monthly active users increased only 5 percent over the same period and operating margin narrowed despite a 55 percent jump in sales from a year earlier.

Even before the most recent revelation that a company insider may be tipping off U.S. authorities in their investigation into Alibaba's accounting practices, bears have had reason to disagree with the rosy story being spun by their brokers. Apart from concerns about its bookkeeping, Alibaba's news ticker over the past year has been filled with reports of a slowing Chinese economy, inability to expand overseas, increasing competition and the cost of absorbing new acquisitions.

Those are perfectly valid reasons for being concerned about the stock. Yet Alibaba has always had a rebuttal. In its August call, Vice Chairman Joe Tsai told investors that while it faced skepticism because of "economic headwinds and reduced expectations from the industry," Alibaba's leadership "never had any doubt that we would be able to deliver increasing monetization of our users."

Alibaba wants to decouple growth from transaction volume -- which the industry jargonistically calls Gross Merchandise Value -- as if its customers are somehow loyal to Alibaba and not just after the cheapest deals or best knockoffs.

Our high-value and highly-engaged users attract brands and merchants who increasingly rely on our online marketing solutions to reach and engage with these consumers.

That's better spin than a Roger Federer forehand.

But the other plank of Alibaba's platform is one that's getting a lot of interest: cloud services. Alibaba executives want to make cloud computing the center of a global push, mimicking and competing with Amazon.com Inc.'s strategy based on Amazon Web Services. 

Unfortunately, Alibaba is late to the game. It may have a solid position in China, but it's facing stiff competition from its mentor in overseas territories where it can compete only on price. Analysts are hopeful that Alibaba can turn its cloud business profitable, but it won't take much for some stiff competition to push that back into the red again and to keep it there. 

Birds of a Feather
About the only thing Amazon and Alibaba share are their stock performances over the past year
Source: Bloomberg

Alibaba lacks the technology, the trust and the gravitas that Amazon enjoys, while Amazon has shown no compunction about burning money to kill off rivals. Given the desperation of Baidu Inc. and Tencent Holdings Ltd. to leverage their own massive server farms and big data, you can expect yet another bout of rivalry to kill earnings.

Should Alibaba be willing to accept minimal margins in return for luring more clients into its orbit, then cloud computing will be little more than a marketing tool, which brings it back to relying on those customers it so quaintly believes are loyal.

And if there's one thing hedge funds understand, it's how fickle loyalty is as a store of value.

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

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net