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The Most Serious Alibaba Warning Signal Yet
Orange Peel Investments
By Scott Tzu
Those that have been reading us know that we have put together a series of skeptical articles on Alibaba (NYSE:BABA) over the last six months. Recently, we have been more prolific in our analysis of the company due to certain red flags that have been raised of late. The news of the SEC investigation into the company seems to have been already forgotten by the market, and the market never really seemed to care about some of the other red flags that we wrote about in the past. That's all good and well.
Except today, we have what we believe to be the biggest red flag for the company so far. It is something simple, but something that short-sellers and market skeptics have seen for years as a sign of trouble. When Jack Ma came out recently and made a statement to the media that American investors simply do not understand Alibaba, our ears immediately perked up.
Ma was quoted in this Business Insider article,
Alibaba Group Holding Ltd, whose accounting practices are under investigation by U.S. regulators, is a difficult company for the United States to understand, Executive Chairman Jack Ma said in an interview to Chinese media on Friday.
The U.S. Securities and Exchange Commission (SEC) launched a probe earlier this year into the Chinese e-commerce firm's accounting practices to determine whether they violated federal laws. Questions about Alibaba's growth rate and its relations with affiliated companies have dogged the firm for years.
In the interview with China's official Securities Times, Ma said the investigation does not mean Alibaba has problems but that the SEC is just performing its duties.
"Alibaba's business model does not have any references in the U.S., so it's not just a matter of one or two days for the U.S. to understand Alibaba's business model," Ma was quoted as saying.
Anybody that is familiar with the short selling world understands that when a company is challenged or questioned by a short seller, the best thing for them to do is to simply defend themselves with the truth. If the truth is on their side, this is a very easy thing to do. If the truth is not on the side of the company and the short seller is correct, many times companies will respond with vague comments informing short-sellers or other skeptics that they simply "do not understand the business."
That's why this line of logic from Ma gives us more caution. He is essentially telling U.S. banks and investors (who have lent him and his company over $6 billion recently) that they don't understand GAAP accounting, the same standard that all companies listed in the U.S. are held to.
Any seasoned investor or short seller that has been in the business for a while will tell you that this is a common defense for companies when they're in the wrong. Simply writing off the investing public or whatever critic of the company and challenging them as somebody who "does not understand the business," is a fallacy. Usually, short-sellers that go activist on companies tend to know the company better than management sometimes. In this case, now that certain intricacies of Alibaba's business model are being questioned, Jack Ma's response to say that people don't understand the business is absolutely appalling.
Not exactly something you'd say the day before the IPO, is it?
For us, this is the surest sign that something is wrong below the surface at Alibaba that we have ever seen.
American investors are presented with prospectuses before companies IPO all the time. They are familiar with the way that companies outside of the US list on US exchanges. They are familiar with GAAP (generally accepted accounting principles). These are the rules that Alibaba must abide by. End of story, nothing else to "figure out".
One of the benefits of analyzing a public company is that, from an analysis standpoint, companies are held to the same standards as every other company that is on a major US listed exchange. Reporting standards are exactly the same and your accounting standards are also exactly the same. So, if Ma is saying that US investors do not understand his company, one that has to ask what Alibaba is doing that is outside the realm of what a normal US publicly listed company would be doing that makes it so difficult to understand.
A blanket statement dismissal like this of a challenge of the business is one of the largest red flags we have seen to date with this company. It is insulting to people's intelligence that are familiar with the business and Ma's statements likely have done more harm than good, as short-sellers usually flock to companies where executives make such dismissive statements.
Further, if Americans simply "do not understand" Alibaba, why isn't Jack Ma out there doing his best to create the transparency and the necessary disclosure so that US investors and institutions can understand the business in the matter which he speaks of?
The United States capital markets are available to Mr. Ma for his convenience, but there is a standard in which Mr. Ma must meet and there are answers and disclosures that he owes to American investors and the exchange he is listed on. Instead of making dismissive comments, Mr. Ma should be thinking about what he could do to improve disclosure at his company.
Also, instead of encouraging this nonsense from Mr. Ma, US retail investors and institutions should be holding this company's feet to the fire and demanding answers, refusing to invest in the company or give them investment bank business until the company has done so. Everyone that is a part of the system that has allowed Alibaba to continue after these comments have been made are doing the United States capital markets a disservice.
Disclosure: I am/we are short BABA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The Most Serious Alibaba Warning Signal Yet
Orange Peel Investments
By Scott Tzu
Those that have been reading us know that we have put together a series of skeptical articles on Alibaba (NYSE:BABA) over the last six months. Recently, we have been more prolific in our analysis of the company due to certain red flags that have been raised of late. The news of the SEC investigation into the company seems to have been already forgotten by the market, and the market never really seemed to care about some of the other red flags that we wrote about in the past. That's all good and well.
Except today, we have what we believe to be the biggest red flag for the company so far. It is something simple, but something that short-sellers and market skeptics have seen for years as a sign of trouble. When Jack Ma came out recently and made a statement to the media that American investors simply do not understand Alibaba, our ears immediately perked up.
Ma was quoted in this Business Insider article,
Alibaba Group Holding Ltd, whose accounting practices are under investigation by U.S. regulators, is a difficult company for the United States to understand, Executive Chairman Jack Ma said in an interview to Chinese media on Friday.
The U.S. Securities and Exchange Commission (SEC) launched a probe earlier this year into the Chinese e-commerce firm's accounting practices to determine whether they violated federal laws. Questions about Alibaba's growth rate and its relations with affiliated companies have dogged the firm for years.
In the interview with China's official Securities Times, Ma said the investigation does not mean Alibaba has problems but that the SEC is just performing its duties.
"Alibaba's business model does not have any references in the U.S., so it's not just a matter of one or two days for the U.S. to understand Alibaba's business model," Ma was quoted as saying.
Anybody that is familiar with the short selling world understands that when a company is challenged or questioned by a short seller, the best thing for them to do is to simply defend themselves with the truth. If the truth is on their side, this is a very easy thing to do. If the truth is not on the side of the company and the short seller is correct, many times companies will respond with vague comments informing short-sellers or other skeptics that they simply "do not understand the business."
That's why this line of logic from Ma gives us more caution. He is essentially telling U.S. banks and investors (who have lent him and his company over $6 billion recently) that they don't understand GAAP accounting, the same standard that all companies listed in the U.S. are held to.
Any seasoned investor or short seller that has been in the business for a while will tell you that this is a common defense for companies when they're in the wrong. Simply writing off the investing public or whatever critic of the company and challenging them as somebody who "does not understand the business," is a fallacy. Usually, short-sellers that go activist on companies tend to know the company better than management sometimes. In this case, now that certain intricacies of Alibaba's business model are being questioned, Jack Ma's response to say that people don't understand the business is absolutely appalling.
Not exactly something you'd say the day before the IPO, is it?
For us, this is the surest sign that something is wrong below the surface at Alibaba that we have ever seen.
American investors are presented with prospectuses before companies IPO all the time. They are familiar with the way that companies outside of the US list on US exchanges. They are familiar with GAAP (generally accepted accounting principles). These are the rules that Alibaba must abide by. End of story, nothing else to "figure out".
One of the benefits of analyzing a public company is that, from an analysis standpoint, companies are held to the same standards as every other company that is on a major US listed exchange. Reporting standards are exactly the same and your accounting standards are also exactly the same. So, if Ma is saying that US investors do not understand his company, one that has to ask what Alibaba is doing that is outside the realm of what a normal US publicly listed company would be doing that makes it so difficult to understand.
A blanket statement dismissal like this of a challenge of the business is one of the largest red flags we have seen to date with this company. It is insulting to people's intelligence that are familiar with the business and Ma's statements likely have done more harm than good, as short-sellers usually flock to companies where executives make such dismissive statements.
Further, if Americans simply "do not understand" Alibaba, why isn't Jack Ma out there doing his best to create the transparency and the necessary disclosure so that US investors and institutions can understand the business in the matter which he speaks of?
The United States capital markets are available to Mr. Ma for his convenience, but there is a standard in which Mr. Ma must meet and there are answers and disclosures that he owes to American investors and the exchange he is listed on. Instead of making dismissive comments, Mr. Ma should be thinking about what he could do to improve disclosure at his company.
Also, instead of encouraging this nonsense from Mr. Ma, US retail investors and institutions should be holding this company's feet to the fire and demanding answers, refusing to invest in the company or give them investment bank business until the company has done so. Everyone that is a part of the system that has allowed Alibaba to continue after these comments have been made are doing the United States capital markets a disservice.
Disclosure: I am/we are short BABA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
