Misery loves company, which explains why nobody is hating Alibaba Group Holding Ltd (NYSE:BABA). On a year-to-date basis, Alibaba has soared to a 41% gain in the markets. Questions about whether it could climb to previous highs were swept aside this year. As a result, according to InvestorPlace contributor Lucas Hahn, “of the 45 analysts covering BABA stock, 41 say it’s a ‘Buy’ or ‘Strong Buy.'”
Needless to say, Alibaba stock doubters are numerically a lonely crowd. They do, however, have one very significant proponent.
The Terminator himself, Jim Chanos, founder of Kynikos Associates, has been bearish on BABA for some time. Chanos, who recommended shorting Enron before its implosion, has questions about the e-commerce giant’s accounting process. He believes that important details are missing from Alibaba’s disclosures.
Chanos remarked, “I would want to know if I’m investing in a $280 billion company that’s supposedly on the forefront of the digital revolution of China why it’s so cash flow negative and we can’t good answers.” Just recently, the renowned fund manager warned of a Chinese credit bubble, so presumably, he’s still bearish on Alibaba stock.
When you have such a prominent figure on your side, it’s tempting to get a little cocky. But one important point about Chanos must be addressed: without active management, his short positions are not consistently profitable. Should investors now ignore the bears? Or should they consider going negative now that BABA stock is at all-time highs?
The China Tailwind Isn’t What It Seems
The primary bullish argument is that BABA stock is the next Amazon.com, Inc. (NASDAQ:AMZN). This point is further dressed up with a library of financial data and upside forecasts. Additionally, the big one is the population, which is rapidly approaching 1.4 billion. To paraphrase President Trump, China is “yuge,” and everybody knows it.
Naturally, investors are excited about Alibaba. Back home, our retail sector — as defined by the SPDR S&P Retail (ETF) (NYSEARCA:XRT) — is gutted due to lower foot traffic. Of course, Amazon has played a significant role in the sector’s volatility. E-commerce is taking a bigger share of the retail pie, which means BABA stock can do the same in China.
I have one problem with this argument. Practically speaking, internet penetration in the U.S. is 100%. In China, penetration is a little more than half the population. That leaves the other half completely in the dark.
But that’s an amazing upside opportunity for BABA stock, many will claim.
Click to Enlarge The statistics do not bear this out. Between 2006 through the end of 2009, internet penetration rates were 37%. However, in the current decade, penetration has slowed to under 10%. The law of big numbers really caught up in the last three years, when the rate dwindled to under 6%.
When we talk about Alibaba’s potential, we can’t leave out demand. In other words, it’s not how many people are in China — it’s how many Chinese people can afford to buy extraneous junk on the internet.
If we look at China’s GDP per capita, I’m not too confident about the great, red dragon. Since 2011, economic activity per capita has slipped into single-digit growth. I don’t care how big the dragon is — if it can’t pay, it can’t pay.
BABA Stock Can’t Afford to Relax
The bullish argument also assumes that Alibaba stock maintains its dominance in its core markets. But as Mr. Hahn points out, that’s no guarantee. Social-gaming giant Tencent Holdings Ltd (OTCMKTS:TCEHY) has aggressively targeted BABA in two growth areas — payments and cloud computing. To spice things up, Tencent is more than holding its own in the fight.
Another risk factor is that BABA stock hasn’t always backed up its hype. For instance, Amazon Web Services is the dominant presence in cloud computing. Hahn writes that “Two years ago, Alibaba set a goal of overtaking AWS in four years, but AliCloud remains a minor player globally, and its sales are a fraction of Amazon’s.”
Admittedly, the ultimate counterargument remains the technicals. Alibaba stock is soaring, and everybody does indeed know it. At the same time, BABA was introduced at an initial public offering of $68. For all the hoopla, investors that got in at the very beginning are up 77%. It’s a little disappointing for the “next Amazon.”
I’m no Jim Chanos, but I’m feeling his overall argument. I think there’s too much speculation towards BABA stock that’s not really justified. He’s looking at the problem from a granular, accounting perspective. I see challenges in the overall market. But the bottom line moving forward is that investors can have their money better served elsewhere.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.