Short seller makes a startling contrarian call: go long on Alibaba shares till it hits US$250

Bullish prediction comes ahead of Alibaba’s release of fourth-quarter results

PUBLISHED : Friday, 04 May, 2018, 6:08pm
UPDATED : Saturday, 05 May, 2018, 1:58pm

High profile short-seller and founder of Citron Research Andrew Left is bullish on Alibaba Group Holding, on what he says is “the world’s most shorted stock”, ahead of the e-commerce giant reporting earnings later this evening.

The New York-listed firm is expected to post a net profit of 14 billion yuan (US$2.2 billion) in the fourth quarter, compared to 20 billion yuan in the previous quarter, the smallest in 1.5 years, according to a Bloomberg survey of analysts.

Revenue is expected to climb 53 per cent to 59 billion yuan, but that would be the slowest in eight months, weighed by its investments in logistics, cloud computing, online video and physical retail.

The interest to short Alibaba’s New York shares has been rising sharply. It currently stands at about 124 million shares compared to 20 million shares in September 2014, according to Bloomberg data. Alibaba is owner of the South China Morning Post.

Analysts such as Qiu Zhicheng at ICBC International were also cautious about the overall equities market given the ongoing US-China trade dispute. He said he was not optimistic of any breakthrough deal emerging any time soon.

However, Left said in a research report that Alibaba’s stock price was on its way to US$250 as it was trading at a 40 per cent discount to Amazon even though the former’s business model is more asset light and empowers small businesses.

Alibaba’s ADRs closed at US$182.45 on Thursday in New York, after rising for six straight days.

A Wall Street Journal analysis of 111 Citron short-selling reports published from 2001 to 2014 shows an average share price decline of 42 per cent in the year after a Citron report was released. Of those shares, 90 were lower one year later while 21 gained, according to data from S&P Capital.

If Alibaba showed lower than expected operating margins due to value-creating investments, then that would actually give investors an opportunity to buy what could be the first US$1 trillion company at a cheap price, said Citron founder.

“Alibaba has created a global enterprise with a footprint that includes every buzzword from artificial intelligence, cloud, data centre, ride-sharing,” said Left, who has made a profit every year since he started short selling 14 years ago.

The larger Amazon becomes, the more they must fear government interference in their business, whether it be postage, taxation or antitrust. On the other hand, the Chinese government blesses the reach of Alibaba as its partnering with Alibaba on key initiatives for the “New China”, Left added.

Last month, the State Council provided further details on the eligibility requirements for the listing of China Depositary Receipts (CDR) in an effort to lure Chinese ADRs to list back home and make them available for mainland investors.

Media have reported that Alibaba’s secondary listing in the local Chinese A-share market could happen as soon as this summer.

Left said that a secondary listing would be a major catalyst for Alibaba’s ADR stock because other locally listed Chinese stocks such as Qihoo, Focus Media, and Giant Interactive, were trading at a premium to their US counterparts. The relisting of these companies in Shanghai and Shenzhen led to an increase in their market cap

Additional reporting by Shidong Zhang