Alibaba Group Holding Ltd (BABA) stock fell below the $80 level on Wednesday, losing about 4% in early trading after the Chinese e-commerce giant revealed in a regulatory filing that the Securities and Exchange Commission has it under investigation.
At issue are several of Alibaba’s accounting practices, including its consolidation policies, practices regarding related party transactions, and most visibly, the way it reports Singles’ Day operating data.
Let’s be clear: Wall Street obviously isn’t expecting the SEC’s investigation to yield anything so scandalous that it threatens to destroy BABA stock investors…but this is objectively bad news, and tantamount to yet another unusual risk that Alibaba shareholders should be wary of.
BABA Stock: SEC Snooping Is No Good
Investors expect to be well-compensated for taking calculated risks, and Alibaba shares have definitely failed to deliver in that regard. BABA stock is now down about 4% in 2016 and 16% in the past year.
A flood of counterfeit goods on Alibaba’s platforms have been a risk for BABA investors from the beginning; Alibaba’s corporate governance issues have also colored its risk profile, as U.S. investors technically don’t even own Alibaba outright. Founder and CEO Jack Ma and a small group of elite early investors can essentially outvote everyone else and do as they please.
Getting back to the SEC investigation, it’d be nice to know exactly what regulators are interested in learning about.
Singles’ Day (Nov. 11) is a very, very important part of the BABA stock story. It’s a Chinese holiday that originated as a celebration of being single — hence the repetition of the loneliest number in the date 11/11 — but that has morphed into the single-largest online shopping holiday in the world.
Alibaba has played a central role in this cultural phenomenon, spending billions to promote the site-wide, limited-time, bargain-bin sales on its sites. BABA actually has exclusive rights to use the Chinese version of the term “Double 11,” giving it a distinct promotional advantage over its competitors. Imagine if Hallmark owned the term “Valentine’s Day.”
BABA stock owners certainly don’t mind this exclusivity, especially when the numbers (as reported) are so mind-numbingly impressive. Last year, it demolished previous records, posting sales of $14.32 billion, up 60% year-over-year…all in a 24-hour period.
If you take Alibaba’s Singles’ Day sales and annualize them, you get $5.226 trillion, or more than 10 times the annual sales of Wal-Mart Stores, Inc. (WMT), which is the largest company in the world by revenue at $482 billion in fiscal 2016.
These enormous single-day numbers are frequently touted by Alibaba itself, and the company actually obsessively updates key performance indicators throughout the day on a site dedicated to displaying them.
With BABA stock owners watching these explosive metrics closely, and the financial media’s obsession with the otherworldly numbers, Alibaba certainly has an incentive to keep growing them rapidly year after year.
Does that mean the company is getting creative with accounting to fit more revenue in that 24-hour period? Is the SEC finding it difficult to reconcile Jack Ma’s live CNBC comments on Singles’ Day sales with those reported elsewhere? I’m prognosticating a bit here; investors likely won’t have much more insight into how meaningful this SEC headache is until the whole thing’s over, and there’s no known timeline for that.
Until then, I suppose you could take a flier on BABA stock and buy it on weakness — but for married investors, Singles’ Day shenanigans could make them unexpectedly single again themselves in a worst-case scenario.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
