Since its initial public offering (IPO) on Sept. 19, 2014, Alibaba Group Holding Limited (NYSE: BABA) has received criticism about how it communicates its financial results. Prominent analysts and investors complain that the company avoids disclosure of important information about its operations. They also claim that Alibaba exaggerates positive data and downplays negative information. Ultimately, according to critics, the company's deception and lack of transparency make it impossible to value. Defenders of Alibaba, including company management, dismiss criticisms about its transparency. They note that the company provides detailed data about its subsidiaries and extensive metrics about its users.
Conference Call Controversy
Alibaba's third-quarter conference call, which occurred on Jan. 28, 2016, reignited the ongoing debate about the company's transparency. The call, on which 10 analysts questioned four executives from the company, included several questions about how the company reports information. One analyst, Ken Sena of Evercore Group LLC, asked CEO Daniel Yong Zhang to explain how the company plans to disclose a component of advertising spending. Zhang answered part of Sena's question but did not address the issue of disclosure. After Sena attempted to follow up, the head of investor relations, Jane Penner, abruptly ended the call. The incident, in the view of many, is part of a pattern of evasiveness by the company.
Company Reports Controversial Numbers
The bears on Alibaba's stock may point to the company's rich valuation to support its cause. The company's transaction values have been steadily declining over the past two years. Furthermore, as of June 13, 2016, the company looked expensive based on several valuation multiples, including its 12.29 trailing 12-month (TTM) price-to-sales ratio and its 32.75 enterprise value/EBITDA multiple. In addition, the company faces competition from rivals such as JD.com Inc. (NASDAQ: JD).
However, the company's lack of transparency and honesty in reporting its numbers may be the most important reason to view it with skepticism. Transaction volumes grew at a compound annual growth rate (CAGR) of 55% for the past three years, and revenues grew at a CAGR of 56%. Those numbers are much higher than other internet companies, such as Alphabet Inc. (NASDAQ: GOOGL), Amazon.com Inc. (NASDAQ: AMZN) and Facebook Inc. (NASDAQ: FB). Anne Stevenson-Yang, founder of Chinese research firm J Capital Research, noted that Alibaba's numbers did not comport with official Chinese government growth numbers. In addition, some analysts argue that the company's purported 367 million users is puzzling, considering this represents the entire population of online shoppers according to government estimates. Also, the company's claims that the average shopper on its site spends $1,215 annually seem dubious, considering that the average U.S. online shopper spends $1,655 annually, and the U.S. per capital economic output is seven times that of China.
Criticism of Accounting
Some observers, such as prominent money manager Jim Chanos, have questioned the company's use of off-balance-sheet entities. Chanos noted that Alibaba does not include the results from its delivery operations in its consolidated financial statements. As a result, he argues, the company may be overstating its cash flow and earnings numbers. Alibaba reports the results for the Cainiao network, the logistics and distribution channel in which it owns a 47% stake, separately from its own results. Cainiao reported a loss of $15 million in the first quarter of 2016, but it offset those gains from the higher valuation it received when it raised additional funds in March 2016. The company believes the high valuation Cainiao received justifies its strength as a standalone company. In addition, the company claims that it is breaking out the results of the off-balance-sheet investment for its shareholders.
On May 26, 2016, Alibaba announced the U.S. Securities and Exchange Commission (SEC) was investigating whether its accounting practices violated federal laws. As part of the investigation, Alibaba gave the SEC information about its accounting for Cainiao. The company also provided the SEC with operating data from its Singles' Day shopping festival, which is the biggest shopping festival in the world. Although the SEC has not commented on the details of its investigation, some critics have complained in the past that the company reports Singles' Day sales as gross merchandise volume, which they say is misleading.