By Gunjan Banerji
Although shares of Alibaba Group Holding Ltd. have surged 77% in price from a low in September 2015, many investors are selling the company short, anticipating trouble ahead for the Chinese e-commerce giant.
Alibaba, which has posted a string of quarters showing revenue gains, has appealed to investors as a way to profit on what hasbeen to now buoyant consumer spending in China. Still, there are persisting concerns the company's profitability is overstated, alongside broader uncertainty about China's economy, said Wedbush Securities Inc.'s Gil Luria.
And after a run-up in the stock's price and lofty expectations for growth, short sellers have been targeting Alibaba before Wednesday's quarterly earnings report and China's Singles' Day on Nov. 11, the biggest e-commerce shopping day that last year netted the company a blockbuster $14.3 billion in sales.
Short selling involves an investor selling stock he or she doesn't yet own in a company, hoping to buy the shares and deliver them later when the price has fallen, thus netting a profit.
Short interest, or the volume of shares sold short and not yet covered, in Alibaba has surged 49% this year, an increase equivalent to about $3.9 billion, according to data from financial analytics firm S3 Partners.
Most of the bearish wagers were made in the second half of the year, as such bets against the company reached a record $12.9 billion at the end of September. The level of short interest has since slipped to $11.6 billion, data from New York-based S3 show.
Growing concern about the company has come as fresh doubts emerged on Oct. 19 over the reliability of official Chinese statistics after the country said the economy grew 6.7% for third consecutive quarter. Economists noted it is rare for a fast-growing economy to clock the same growth quarter after quarter.
"When the Chinese economy decelerates, Alibaba will decelerate as well," said Mr. Luria, who has a hold rating on Alibaba, setting him apart from the large number of analysts who advise investors to buy the shares, according to Thomson Reuters data. Mr. Luria doesn't see the Chinese economy continuing to grow at rates seen in the past.
Waning enthusiasm about the Chinese economy might also have been evident in the first day of trading for ZTO Express Inc. The Shanghai-based logistics company that gets most of its business from Alibaba tumbled 15% from its initial public offering price in its debut on Oct 27.
Adding to the nervousness, SoftBank Group Corp. cashed in earlier this year on the rally in Alibaba shares, selling its $10 billion stake in the company.
Meanwhile, the options market is indicating a 5.4% price swing in Alibaba after the company reports earnings on Wednesday, in line with the 5.3% fluctuation the shares posted on average over the last eight quarters, data from Trade Alert show. The expected volatility in the stock has climbed to the highest level since February, FactSet data, based on options, show.
U.S. companies reporting quarterly financial results in the past couple of weeks have shown mixed results in China. Apple Inc. reported on Oct. 25 that fourth-quarter revenue fromthe greater China region tumbled 30% from the same period a year ago, though some of the decline was due to competition from local smartphone makers.
Kynikos Associates founder Jim Chanos is among the most outspoken bears on Alibaba and China. While Alibaba's stock has rallied 22% since he first publicly disclosed he was shorting the company's stock in November 2015, Chanos reiterated his view on CNBC last month, saying corporate governance and transparency issues still permeate the Chinese conglomerate.
Still, while the U.S. retail giant Amazon.com Inc. launched its customer-membership program Prime on mainland China, Needham & Co.'s Kerry Rice doesn't see the Seattle-based company successfully stealing market share away from Alibaba.
Alibaba is "ingrained in the way consumers purchase goods in China. It's very hard to break that pattern of behavior," Rice said, who has a buy rating on the shares.
Write to Gunjan Banerjiat Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
November 02, 2016 02:47 ET (06:47 GMT)
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