BABA Stock – Here’s Why Alibaba Is Doomed

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Alibaba (BABA) has been in a tailspin in 2015, down almost 40% since January and now below its initial offer price of $68 a share.

BABA Stock - Here's Why Alibaba is DoomedSome investors may think this is an opportunity to buy BABA stock on the cheap, given the tremendous potential of e-commerce in China. However, Alibaba stock has been battered for good reasons, and it’s far from certain that the worst is over for BABA.

Here’s why investors holding this Chinese stock should tread very carefully, and why new money shouldn’t consider investing in Alibaba stock right now.

Uncertainty Abounds for BABA Stock

Barron’s made a lot of noise last weekend by predicting another 50% drop for Alibaba stock. And while I disagree with some of the comparisons — for instance, a bright line between fast-growing BABA and stagnant U.S. e-commerce play eBay (EBAY) — it’s undeniable that Barron’s got much right in its analysis.

In fact, Alibaba felt the need to immediately respond to the story in a blog post — hinting that where there’s smoke, there’s fire.

After all, if Jack Ma and other BABA stock execs are so concerned with building a long-term success story, who cares about a short-term dip in share prices or comparisons to other stocks?

One of the biggest sticking points for Barron’s was the “seeming improbability of the growth numbers reported by the company” lately. While there is clearly room for interpretation on some numbers, as InvestorPlace analyst James Brumley pointed out, there are serious problems with the overall picture Alibaba paints in regard to gross merchandise volumes and average online spending metrics.

I agree, and as I said recently in a CNBC interview, the combination of murky metrics and recent revenue problems adds up to quite a bear case for Alibaba stock.

The only reason the bulls have to be optimistic about Alibaba here is the “China miracle” narrative, presuming that just because China is big and has an emerging consumer class, that it adds up to big gains for BABA stock — a very oversimplified narrative, in my estimation.

And as Herb Greenberg at Pacific Square Research said, the serious concerns about opacity of financial metrics generally in China and specifically for BABA stock mean that investors may never truly know what’s going on under the surface, even if they have some numbers to dig into.

For instance, Greenberg is particularly critical of the complicated nature of Alibaba where they make investments in dozens of smaller companies and could in fact be reporting these investments as expenses instead, leading to a lack of transparency and inflated profits.

“They just don’t disclose very important figures here,” Greenberg said recently on CNBC.

Throw in the fact that BABA stock’s unique corporate governance allows the board of directors to act with almost zero oversight, and you have a recipe for shenanigans on your hands.

What We Do Know About BABA Stock Stinks Too

On top of all this uncertainty, what we do know about Alibaba is not exactly a strong bull case for the company.

In August, BABA stock declined sharply after the company reported its slowest revenue growth in three years, missing expectations.

Even after this, Alibaba still trades for a steep premium over revenue, at a current price-to-sales ratio of about 12 and forward price-to-sales ratio of about 8.

And don’t even get me started on sentiment and momentum.

On top of that aforementioned 40% decline or so in 2015, BABA stock has seen short interest skyrocket to the highest levels ever, with some 74 million shares held short as of the end of August.

Bottom Line

This is not a company that has sentiment on its side right now. So even if you want to presume that we have all the facts and that Alibaba isn’t cooking the books, it’s hard to argue that this is a favorable environment for BABA stock.

It all adds up to a recipe for continued declines, and I wouldn’t consider this a buying opportunity at all for Alibaba stock.

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Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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