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Alibaba: Growing Pains
Alibaba's (BABA) shares are down 50% over the last year but their bottom may not be in yet. Latest data reveals that institutional investors sold roughly 108 million of the company's shares during Q4 CY21 on a net basis. This development suggests that this class of investors doesn't perceive the stock to be undervalued just yet and, perhaps, also believes the stock has ample potential to fall even further in the foreseeable future. This should come across as a concerning sign for Alibaba's existing shareholders and dissuade those who are looking to initiate contrarian long positions in the name.
The Institutional Exodus
Let me start by saying that institutional investors aren't always right. However, they do have several tools at their disposal - such as access to company managements, resources to conduct legal analysis and perform scuttlebutt research, supply chain connections etc. - that gives them an edge over retail investors. So, tracking their trading activity can sometimes, if not always, can provide us with leading insights over where a stock might head next.
With that said, institutional investors collectively sold approximately 108 million shares during the last 13F filings cycle. To put the magnitude of this selloff in perspective, the e-commerce giant has 2.7 billion shares outstanding which means these institutions collectively dumped about 4% of Alibaba's entire share total in the last quarter.
Alibaba
Business Quant
Note that the number of institutions that sold Alibaba's shares during the quarter, significantly outnumbered those that bought into the stock. For the record, the 13F filings cycle under discussion spanned from October through December and the data was fully disseminated only this Tuesday. This means the data is still fresh and relevant for our discussion here.
One might argue that this selloff isn't necessarily an alarming development as it might just be a one-time event. But fact of the matter is that institutions have been selling Alibaba's shares continuously for the last three quarters. When I started warning investors about the institutional selloff back in August 2021, these entities were holding approximately 26% of Alibaba's total shares outstanding. This figure has reduced to 17.7% since then and there's ample room for the selloff to still continue in the next couple of quarters.
Next, I wanted to see if Alibaba's top 45 investors traded any differently. After all, if these top investors were net buyers in Alibaba, while a broad swath of other institutions were selling, then the contrarian long positions could've projected a bullish picture. But that apparently wasn't the case here. Per our database at Business Quant, 29 out of Alibaba's 45 largest investors were net sellers during Q4 CY21. This indicates that Alibaba's largest investors also lost confidence in the company's prospects and trimmed their positions during the quarter
Changes in ownership for Alibaba
Business Quant
With that said, I wanted to see if institutional investors were bearish on the entire industry or if they were skeptical (or bearish) specifically on Alibaba. So, I pulled the institutional ownership data for 42 other internet retail stocks listed on US bourses. As it turns out, these institutions grew bullish on 30 other stocks in our study group but were relatively bearish on Alibaba.
Change in institutional ownership during Q4, for internet retail stocks
Business Quant
This, again, projects a disconcerting picture for Alibaba's shareholders and begs the question - why are these institutions growing bearish on Alibaba in spite of its plummeting stock price?
Reasons for Caution
A major risk factor surrounding Alibaba's US-listed shares, are regulatory in nature. The SEC approved a framework in December, an it became effective last month, which requires foreign companies to open up to audit inspections or risk getting delisted.
Maybe Alibaba complies with US regulators, opens to audit inspections and its books turn out to be in order. Or maybe, Alibaba opens up its books and US regulators find discrepancies in its numbers (remember Luckin Coffee accounting scandal?). Whether that happens, to what extent the fraud happens and what happens after that, is pure speculation and is anyone's best guess. Another possibility is Alibaba does not comply with US regulators and gets delisted from US bourses.
The point that I'm trying to make here is that this risk factor didn't exist till a few quarters ago. Its emergence has significantly changed the risk profile involved with investing in Alibaba's US-listed shares, and institutional shareholders might just be adjusting their positions in the name accordingly.
It's important to understand that institutional investors are entities that pool money to buy securities. They could range from mutual funds, hedge funds, pension funds, investment banks, ETFs, insurance companies or involve other organizational structures. Since these entities have different risk profiles, mandates, investing parameters and time horizons, all of them won't necessarily be bullish on Alibaba. For instance, pension funds have the paramount goal of beating inflation while preserving capital. Risk averse institutional investors such as these may be looking at safer investment opportunities elsewhere, rather than initiating contrarian long positions, or staying long, on Alibaba where the capital itself could be at risk.
Besides, Chinese regulators imposed a $2.8 billion antitrust fine on Alibaba last year. Now, it can't strongarm its merchants anymore, and restrict them from listing their products on rival e-commerce platforms. This means that rival e-commerce platforms could gain at Alibaba's expense. The latter could increase its marketing spend but that won't guarantee any results. So, I expect Alibaba's margin profile to deteriorate and its growth momentum to decelerate in the coming quarters. But overall, this operational setback is another reason for institutional investors to rethink their investment thesis and trim their positions in Alibaba to better fit their risk appetite.
Investors Takeaway
There's no denying that Alibaba's shares are attractively valued at current levels, at least in terms of price-to-sales multiples. On the other hand, other rapidly growing internet retail stocks are trading at significantly higher valuation multiples. This relative undervaluation makes Alibaba seem like a lucrative contrarian buy opportunity.
Alibaba
Business Quant
At the same time, let's also remember that institutional investors have been selling Alibaba's shares for several months now. If the stock truly offered risk-free explosive returns at its current levels, this class of sophisticated investors would've been actively buying Alibaba's shares in droves. But that clearly did not happen. There are serious risks involved with investing in Alibaba and that's why its shares are depressed.
So, risk-averse investors may want to avoid the stock for the time being at least. On the other hand, contrarian investors with a higher risk appetite and a tolerance for significant portfolio drawdowns, may want to take advantage of the company's distressed stock price and accumulate it on dips for the long-term. Good Luck!