Why Jim Chanos Is Shorting Alibaba
It looks like Alibaba Group Holding Ltd (NYSE:BABA) is in Jim Chanos’ bad books. The renowned short seller and blunt-talking billionaire is betting heavily on the downfall of BABA stock.
In recent weeks, Jim Chanos has been making the rounds on financial news shows, trashing BABA stock for “questionable” accounting practices. Meanwhile, his fund, Kynikos Associates, has taken a short position on Alibaba’s shares.
“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.],” Chanos said. (Source: “Here’s Why Alibaba’s Accounting Is As Alarming As Enron’s,” Fortune, May 12, 2016.)
That’s a pretty explosive charge when it comes from someone like Chanos. He was one of the first traders to short Enron, arguing that its accounting practices overstated earnings. We all know how that scandal ended.
Enron and Arthur Andersen collapsed, shattering the faith of millions, while also making Chanos a very wealthy man. Ever since that call, he has become the “King of Shorting.”
You can expect lots of other traders to keep away from BABA stock now that Chanos is bearish on the company. Like I said, his words carry weight and they’re weaving an interesting argument against Alibaba.
Chanos thinks the trouble is in the delivery of goods to customers. Let’s say you order something online from Alibaba. You pay for the product and shipping, both of which the company collects as revenue.
But what about Alibaba’s costs? There is obviously some money spent on making and storing the product. It has to be kept in a warehouse somewhere, waiting for the moment someone orders it. There are also fixed costs for software programmers and other staff.
All those expenses appear on Alibaba’s financial statements, so what is Chanos upset about? From what I can tell, his problem is with the way Alibaba reports its delivery activities.
The company doesn’t include those costs on its financial statements.
Since a subsidiary takes care of “shipping and handling,” American shareholders don’t get to see the size of those expenses. Chanos argues that delivery costs are an essential part of Alibaba’s business and that leaving them out can mislead investors.
Think about it: once you’ve paid for a product, your part of the transaction is complete. It is now Alibaba’s responsibility to get the product to you and that can be expensive. The company has to coordinate millions of products being moved by air, sea, rail, and road.
Chanos says Alibaba’s reluctance to share that information set off alarm bells in his head.
“What the company is really earning we don’t know,” he said. “My experience with Chinese companies is that what you don’t know is generally not good news.” (Source: Ibid.)
On a side note, Chanos has generally been bearish on China’s economy. He thinks the Middle Kingdom has a bubble of monstrous proportions and that sooner or later, it has to burst. (Source: “Here’s the moment Jim Chanos knew betting against China was a once in a lifetime opportunity,” Business Insider, April 27, 2016.)
Last year, his long-standing complaints about China’s increasing dependence on debt-financed growth came to fruition. The Chinese stock market crashed by 30% in a single month, then again in January 2016.
Whether or not Jim Chanos is right about Alibaba, his words are going to have a lasting impact on the company’s public persona.