Jim Chanos vs. BABA Stock
Jim Chanos is hell-bent on taking down Alibaba Group Holding Ltd (NYSE:BABA), and it seems to be working. BABA stock fell 8.4% on Wednesday as the Securities and Exchange Commission (SEC) launched an investigation into the firm’s accounting standards. (Source: “Alibaba Discloses SEC Probe of Its Accounting Practices,” The Wall Street Journal, May 25, 2016.)
Although the investigation was undertaken by the SEC, Chanos is the mastermind who orchestrated it. Earlier this month, he was on CNBC saying Alibaba’s accounting practices were “as alarming as Enron’s.” (Source: “Here’s Why Alibaba’s Accounting Is As Alarming As Enron’s,” Fortune, May 12, 2016.)
He also took a broad swipe at China, saying, “[my] experience with Chinese companies is that what you don’t know is generally not good news.” (Source: Ibid.)
Although Alibaba is an e-commerce giant from China, it is also listed on the New York Stock Exchange.
It’s important to remember that Chanos unearthed Enron’s fraudulent activities. He became an instant legend on Wall Street, so regulators were bound to pay attention to his criticisms of Alibaba. He has an uncanny ability for sniffing out bad companies.
Enron, Sunedison, Valeant…the list is simply too long and Chanos was right about all of them. As a short seller, his record is unmatched. That is why it was strange to hear him publicly accuse Alibaba the way he did. It seemed too bold.
He says that Alibaba omits its delivery costs from financial statements. This means that when someone buys an item from the e-commerce giant, it is recorded as revenue, but the cost of shipping that item to the customer is attributed to some random subsidiary.
According to Chanos, this separation of cost and revenue is the problem. It would be like ordering a cake and sending the bill to someone else. He argues that investors cannot accurately price BABA stock without that information.
It should be noted that Alibaba did describe its logistics in this year’s annual report. However, it has not disclosed key details like how much was paid to each logistics partner.
Shareholders only heard about the SEC investigation this week. Although Alibaba is fully co-operating with the investigation, it insists there has been no wrongdoing of any kind.
These kinds of cases can be contentious. Don’t be surprised if there’s added volatility in BABA stock as this saga plays out. As for the outcome, only time and a bunch of overpaid lawyers will tell.