The explosive stock that's dividing Wall Street

  • Alibaba is up more than 90% in 2017, and it’s been winning over some high-profile hedge fund managers
  • The company’s stock is still the most shorted in the world by a magnitude of two, and short sellers are refusing to throw in the towel despite losing billions of dollars

Alibaba has soared to stratospheric new heights this year, winning over plenty of new fans along the way. The legion of admirers now includes a handful of influential hedge fund managers, as well as the lion’s share of research analysts covering the company.

But as is usually the case with something wildly successful, the Chinese e-commerce giant has its fair share of haters. And those detractors have manifested themselves as short sellers, betting billions on the downfall of Alibaba’s shares.

The two factions represent the ongoing tug-of-war taking place under the surface of the stock, which has surged 93% in 2017. On one hand are those under the sway of Alibaba’s fundamentals, which saw the company turn in 62% year-over-year earnings growth in the most recent period, and expand revenue by 56%.

On the other are those that either remain unconvinced, or simply think the shares have climbed too far, too quickly. These people would like nothing more than to see Alibaba come crashing down to earth, and are putting up big money to bet on that outcome, incredible corporate growth be damned.

Screen Shot 2017 08 21 at 10.51.14 AMMarkets InsiderAlibaba has been on fire this year, surging more than 90%.

Let’s break down the two groups further:

The Alibaba bull camp

Recent quarterly filings showed that hedge fund managers are increasingly looking for a piece of Alibaba action. That includes David Tepper’s Appaloosa Management, which picked up roughly 3.7 million of the company’s shares in the second quarter, according to a filing with the US Securities and Exchange Commission. It also includes Daniel Loeb’s Third Point, which bought 4.5 million shares during the period, a filing shows.

While those were the two biggest investments from high-profile funds, there were also others that got involved. Stanley Druckenmiller’s Duquesne Capital recently disclosed a stake of 710,200 shares, and Julian Robertson’s Tiger Management said it bought 214,000 shares, according to SEC filings.

Meanwhile, Alibaba is enjoying near-unanimous bullishness from Wall Street research analysts. The company has 46 buy ratings, with just four holds and zero sell recommendations, according to Bloomberg data.

Those analysts are finding it difficult to say anything bad about the company, which just turned in an earnings report that beat across the board. In addition to the unstoppable-looking profit and sales expansion referenced above, Alibaba also grew revenue for its cloud computing business by a whopping 96% year-over-year.

“We believe BABA is uniquely positioned, with large exposure to both e-commerce and advertising, as well as above-industry growth and above-average EBITDA margins,” UBS analyst Ming Xu wrote in a recent client note. “We remain constructive long term based on expectations for strong revenue growth, sustainability of core margins and strong strategic positioning.”

The Alibaba bear camp

While Alibaba is certainly feeling the love from many areas of the investment landscape, it’s still the most shorted company in the world by a mile. Speculative bears are holding $US22 billion of Alibaba stock short, hoping to profit from a share decline, according to data compiled by financial analytics firm S3 Partners. That’s well over double the position in Tesla, the second most-shorted company worldwide.

Alibaba’s soaring stock price has resulted in massive losses for these sceptics. They have taken a $US9.8 billion bath in 2017, a loss that’s more than twice the next-worst performing short. In fact, they lost $US2 billion last week as Alibaba climbed 10% on its blockbuster earnings report.

But short sellers are refusing to throw in the towel. As Alibaba has climbed at a consistent clip for basically all of 2017, those bearish traders have continued to double down.

So are they simply masochists, or do they have a good reason? Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, thinks it’s the latter.

He says these investors may be treating Alibaba as a proxy to hedge the whole stock market in Hong Kong and China. It’s a tactic similar to one being used in the US market, which has seen traders short the best-performing stocks in the S&P 500 as protection for the broader market.

“Short sellers are hoping that if there is stock market correction in Hong Kong/China, Alibaba will bear the brunt of the decline,” Dusaniwsky wrote in a client note. “The short sellers that remain at this poker table are waiting to see if they will be riding down the river on a rowboat or a yacht.”

If this is truly the main underlying reason for the continuous groundswell of Alibaba short selling, as opposed to outright bearishness on the stock, that would align better with the company’s bullish fundamentals.

With that considered, it becomes more of a situation where Alibaba is a target due to its relative size and success. Because when something reaches rarefied air, it’s inevitable that haters are going to hate.

Get the latest Alibaba stock price here.

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