By Lina Irawan 
In a move that sent ripples through the global investment community, Michael Burry, the enigmatic hedge fund manager famously chronicled in The Big Short for his prescient bet against the U.S. housing market before the 2008 financial crisis, has critically reassessed his position in Chinese tech giants. Burry, through his firm Scion Asset Management, revealed a significant shift in his portfolio: a complete exit from Alibaba Group Holding Ltd. shares, which he now deems "overvalued," and a concurrent pivot into a "large" position in its direct e-commerce rival, JD.com Inc. This bold reallocation underscores a deepening skepticism about Alibaba’s future trajectory, particularly in light of its recent capital-raising efforts and declining profitability.
Burry articulated his strong disapproval of Alibaba’s current valuation and strategic decisions in a post on Substack, stating unequivocally, "I planned to move most of it back after a month or two. No longer." He further emphasized his disinterest, remarking that Alibaba’s share price would need to "fall by half for me to get interested again." Such a categorical statement from a renowned value investor, known for his deep fundamental analysis and contrarian views, carries substantial weight and is likely to prompt other investors to scrutinize their own holdings in the Chinese tech behemoth.
This dramatic portfolio adjustment comes on the heels of Alibaba’s announcement to raise approximately HK$80 billion ($10.2 billion) through a share sale. The company intends to channel these significant funds into its ambitious artificial intelligence (AI) investments, marking what would be Hong Kong’s largest follow-on offering by a company on record. While many companies are eager to invest in the burgeoning field of AI, Burry views this particular share issuance with extreme caution. "I cannot bless share issuances," he asserted, expressing a fundamental concern that such capital injections, especially under current market conditions, would dilute existing shareholder value and fail to generate adequate returns. He explicitly expects a continued decline in Alibaba’s return on invested capital (ROIC), a key metric for assessing a company’s efficiency in deploying its capital to generate profits.
Burry’s skepticism is not unfounded, as Alibaba has been grappling with a challenging economic and regulatory environment in China for several years. The company’s once-unassailable market position has been eroded by increased competition, evolving consumer behaviors, and a stringent regulatory crackdown initiated by Beijing. This crackdown, which famously began with the abrupt suspension of Ant Group’s massive IPO in late 2020 and led to a record $2.8 billion antitrust fine against Alibaba in 2021, fundamentally altered the operating landscape for Chinese tech firms. It introduced an era of heightened scrutiny over data practices, monopolistic behaviors, and capital expansion, forcing companies like Alibaba to recalibrate their growth strategies and prioritize compliance over aggressive market expansion.
The financial repercussions of these pressures are starkly evident in Alibaba’s recent performance. The company reported a staggering 75% profit decline for the quarter ended in June, a direct consequence of its ramped-up AI-related capital spending. While investment in cutting-edge technologies like AI is crucial for long-term competitiveness, the immediate drag on profitability has further spooked investors already wary about future returns from the Chinese tech sector. This significant drop in earnings underscores Burry’s concerns about ROIC, suggesting that the massive capital outlays are not yet translating into commensurate profits, or worse, are being deployed inefficiently.
The market’s reaction to Alibaba’s challenges and its latest capital-raising plan has been decidedly negative. The company’s American Depositary Receipts (ADRs) have plummeted 18.6% for the year to date, experiencing a sharp 8.6% decline on the Friday following the news. Its Hong Kong-listed shares have also suffered, falling 13.9% for the year so far. The offering itself was priced at HK$112.70 per share, notably below the Hong Kong market closing price of HK$123 on the preceding Friday, further indicating investor reluctance and signaling a potentially difficult road ahead for the share sale. This downward trend stands in stark contrast to Burry’s previous bullish stance, as he had only disclosed building a new position in Alibaba in April, suggesting a rapid and profound re-evaluation of the company’s prospects.
Burry’s decision to pivot to JD.com highlights a strategic preference for a different business model within the Chinese e-commerce landscape. Unlike Alibaba’s predominantly marketplace-based model, which connects buyers and sellers, JD.com operates a direct sales model, akin to Amazon in its early days. This involves owning its inventory, managing its logistics, and operating a vast network of warehouses and delivery services across China. This integrated supply chain model gives JD.com greater control over product quality, authenticity, and delivery speeds, often leading to higher customer satisfaction and brand loyalty, particularly in a market where counterfeiting and delivery inefficiencies can be concerns.
From a value investor’s perspective like Burry’s, JD.com’s model might present several advantages. Its direct control over the supply chain could lead to more predictable revenue streams and potentially higher profit margins on goods sold directly. Furthermore, its established logistics infrastructure, which required substantial upfront investment, now serves as a significant competitive moat. While JD.com also faces intense competition from new entrants like PDD Holdings (Pinduoduo and Temu) and short-video platforms like Douyin (TikTok’s Chinese version) that are aggressively moving into e-commerce, its focus on quality, authenticity, and rapid delivery could make it a more resilient player in the long run.
The broader context of China’s economic landscape also plays a crucial role in Burry’s calculus. The Chinese economy has been navigating a period of slower growth, grappling with issues such as a property market downturn, local government debt, and cautious consumer spending. In such an environment, companies with robust, defensible business models and clear paths to profitability might be favored over those engaging in capital-intensive, high-risk ventures like speculative AI investments, especially if the returns are uncertain. Burry’s focus on ROIC suggests he believes Alibaba’s current AI strategy might be a money pit rather than a value generator in the near to medium term.
Moreover, geopolitical tensions and the persistent threat of delisting for Chinese ADRs in the U.S. have cast a long shadow over the entire sector. While the immediate threat has somewhat receded due to provisional agreements between U.S. and Chinese regulators, the underlying risks remain, contributing to the discount applied to many Chinese stocks by Western investors. For a value investor, identifying companies that are fundamentally strong but trading at depressed valuations due to these macro factors is key, but the "overvalued" label for Alibaba suggests Burry sees its price as not reflecting these risks appropriately, or worse, as having an inflated valuation even given its challenges.
Analysts and market watchers are now keenly observing how Burry’s latest pronouncement will influence broader sentiment. While individual investors might not directly replicate Burry’s trades, his track record of identifying market inefficiencies and his willingness to take contrarian positions often sparks deeper analysis. His previous bet on Alibaba in April indicated an initial belief in its recovery potential, but the rapid reversal underscores the dynamic and unpredictable nature of the Chinese tech market. The shift away from Alibaba, once a darling of global investors, towards a more operationally focused rival like JD.com could signal a broader trend among sophisticated investors seeking more tangible value and less speculative growth within the volatile Chinese technology sector.
In conclusion, Michael Burry’s dramatic exit from Alibaba and his subsequent embrace of JD.com is far more than a simple portfolio adjustment; it’s a profound statement on the current state and future prospects of China’s e-commerce giants. His criticisms of Alibaba’s valuation, its share issuance plans, and anticipated declining ROIC, combined with the company’s recent profit slump amidst heavy AI investments, paint a challenging picture. By contrast, his pivot to JD.com suggests a preference for its integrated business model and perhaps a perception of greater underlying value and resilience. This move by one of the most respected contrarian investors is a clarion call for a reassessment of investment strategies in the Chinese tech space, urging a deeper look beyond growth narratives to fundamental financial health and sustainable value creation. The coming months will reveal whether Burry’s latest "Big Short" in a sense, or rather a "Big Long" on its competitor, once again proves prescient.
