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Alibaba Stock: The Massive $22 Billion Bet That's Going Horribly Wrong, For Now

Alibaba Group Holding Ltd. shorts are down $9.8 billion this year. With a $22 billion bet against Alibaba stock, the bears could be in for more pain.

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Shares of Chinese e-commerce major Alibaba Group Holding Ltd. (NYSE:BABA) are going through one hell of a bull run. The Jack Ma-led company is now worth $446.8 billion, with over $220 billion of that value getting added this year alone. The bulls have clearly been cheering Alibaba stock, but the bears haven't been quiet either. With over $22 billion worth of shorted stock, will the Alibaba stock rally be brought to a grinding halt? Or, will the shorts be squeezed out, adding weight to the already impressive run the stock has had. In context of this interesting battle, Is Alibaba stock a good buy?

The Massive $22 Billion Bet Against Alibaba Stock

Shorts have been piling onto Alibaba stock. As per the latest data from S3 partners, Alibaba is the most shorted stock around the world, with over $22.1 billion worth of shares shorted as of August 18. The dollar value of short interest is up from $16.7 billion in June, and $9.8 billion at the start of this year. In other words, the short interest against BABA stock is up by a whopping 125% this year. And well, this has come on the back of massive losses for the shorts, which have been driven by a 98% gain in Alibaba stock price. According to the latest data from S3 partners, Alibaba shorts are down by nearly $9.8 billion in mark-to-market (MTM) losses for the year, equating to a 66.4% loss.

All in all, Alibaba shorts have been having a pretty torrid time. And, if the recent Wall Street commentary is anything to by, the Alibaba bears are in for more pain, with Alibaba stock expected to hit $200 sometime soon.

Wall Street Is Increasingly Bullish On Alibaba Stock

As we had covered in our post earnings Alibaba commentary, a number of Wall Street analysts have hiked their ratings and price targets for Alibaba stock following a solid quarter, which saw the company grow its top line by 56% and earnings by 62%, on a year-on-year basis. Raymond James and DBS Vickers Securities were the most noteworthy bulls, upping their price targets to $220 per share. The $220 price target represents an upside of over 26% to the last closing price. The bullishness of wall street analysts is evident from the fact that out of 45 analysts covering the stock, 42 have a 'buy' or 'strong buy' rating on the stock (Yahoo Finance data).

Sell side research analysts aren't the only people falling in love with Alibaba stock. Hedge funds have been busy mopping up shares of the e-commerce-to-cloud giant, with at least four major hedge funds buying new stakes in the second quarter. As per reports from CNBC, Third Point's Dan Loeb and Appaloosa's David Tepper were the most noteworthy hedge fund buyers in the second quarter, buying a total of 8.2 million shares of Alibaba. Along with 0.924 million shares bought by Duquesne Capital and Tiger Management, new hedge fund stakes in Alibaba totaled 9.124 million shares in Q2.

Another proof of the increasingly bullish sentiment around Alibaba stock is also the recent trends in EPS estimates. Wall Street consensus has steadily climbed higher over the last 90 days, with Q2 2018 (Sep 2017) EPS estimates rising by 12% over the last 90 days. Similarly, estimates have ticked higher for Q3 2018 (Dec 2017 ending quarter), as well as for FY 2018 and FY 2019 (Source: Yahoo Finance).

Is Alibaba Stock Really Expensive?

The rant of the bears has been that Alibaba stock has run 'too fast, too high.' Another section points to the seemingly expensive valuations Alibaba stock is currently trading at. However, investors should note that most of these bears point to trailing multiples, which isn't really what is driving the stock. Wall Street expects the company to report EPS of $6.45 in FY 2019 (March 2019 ending), which implies a 35.5% CAGR from FY 2017-FY 2019. On a forward basis, Alibaba stock currently trades at 27x the FY2019 EPS estimate, which isn't expensive when you consider the expected growth of over 35%. In other words, it's hard to believe that Alibaba is expensively valued when we factor in the growth the Chinese behemoth is generating.

A Short Squeeze Could Aid Alibaba Stock Rally

In light of the weak 'overvaluation' argument and the hugely positive Wall Street signals, it's hard to believe that the Alibaba stock rally will come to a halt anytime soon. And if Alibaba stock is still some distance from the peak, the journey for the Alibaba shorts is set to become more painful and costlier. More importantly, given the scale of the bets against the stock, it isn't hard to imagine a situation wherein shorts could be squeezed out of their positions. In other words, more likely than not, the massive $22 billion bet against Alibaba stock is going to fail. Short sellers could be in for more losses and a possible short squeeze if Alibaba stock can maintain its momentum, as is widely speculated. As Dimitra DeFotis of Barron's writes, the huge Alibaba short could well be the world's worst bet.

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