Alibaba Group Holding Ltd Chair’s Amazing Response to BABA Stock Bears

BABA StockTsai Strikes Back for Alibaba Stock

Alibaba Holding Group Ltd (NYSE:BABA) is being hunted by Jim Chanos, the billionaire and notorious short-seller. He’s betting on a crash in BABA stock, but that position hasn’t been working well for him. Alibaba stock grew more than 51% in the last year, something that was pointed out yet another billionaire.

Alibaba co-founder and executive vice chair Joseph Tsai hammered this point home while speaking at the Delivering Alpha conference on Tuesday. The event was hosted by CNBC and the publisher Institutional InvestorDuring a panel discussion, Tsai went off-script, throwing a proverbial elbow at Chanos and other Alibaba stock bears.

“You’ve got to pay a lot of respect to him to withstand that kind of pain,” he said. (Source: “Alibaba’s Tsai: Chanos withstanding ‘pain’ for shorting our stock,” CNBC, September 13, 2016.)

Burn. Short-sellers borrow stock from a third party so they can sell that stock in the hopes the company’s stock will fall. If the share price drops, the short-seller can repurchase them at a lower price and pocket the difference. But if the price goes up, like Alibaba stock has, then the short-seller accumulates paper losses. Worse still, there’s no limit to a stock’s upside, which means the short-seller can theoretically lose more than their initial sum.

Think about that: Alibaba stock already appreciated by more than 51%, meaning Jim Chanos has already suffered huge losses. If the share price continues its upward trek, there’s no telling how much more money Chanos could lose.

Scary stuff, right? You need an iron stomach for short-selling. Regardless of whether he’s right or wrong about Alibaba stock, Chanos certainly has the toughness needed to take such a risky bet. He was (according to Barron‘s) the first man on Wall Street to unearth the Enron scandal, leading to one of the greatest shorts in financial history. Chanos has credibility.

What This Means for BABA Stock

That’s why people took it seriously when Chanos said, “The accounting at Alibaba is some of the most questionable I have ever seen for a major multi-billion market cap company that went public [in the U.S.].” (Source: “Here’s Why Alibaba’s Accounting Is As Alarming As Enron’s,” Fortune, May 12, 2016.)

The Securities & Exchange Commission responded to Chanos’s suggestions by launching an investigation into Alibaba’s practices. However, both investors and analysts don’t really seem disturbed by the inquiry. They argue that Chanos and the SEC simply don’t understand the company’s business model. “He doesn’t seem to try to understand the business and understand the power of the digital economy in China,” said Tsai when speaking of Chanos.

Similar comments were made by analysts. (Source: “Short sellers circle Alibaba amid SEC probe,” Reuters, May 26, 2016.) In a research note, Deutsche Bank AG wrote, “While we would never be dismissive of an SEC inquiry, we believe that investigations are sometimes launched because the SEC is unfamiliar with various [business models].”

This year’s rise in Alibaba stock also speaks to investor confidence in the company. If the investigation ends without charges against Alibaba, Jim Chanos and other BABA stock bears may have to write down their losses.

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