$Alibaba(09988)$ 

Interesting and possible theory why BABA has not been able to rise despite good fundamental results

#JustDarioDaily

🚨IN A SCRAMBLE TO SURVIVE, SOFTBANK IS KILLING ALIBABA! 🚨

$BABA closed the last session crashing 9% after results beating expectations across the board, leaving many dumbfounded. Of course, the media quickly made up a narrative to write a story that could more or less fit the price action: "Alibaba crashes after pulling its Cloud Unit listing due to US sanctions risk." I won't waste characters explaining why this is an asinine excuse.

A few days ago, I wrote a short post titled "SOFTBANK SOLD BABA TO THE DEVIL TO GET CASH AND TRY TO SAVE ITSELF" (x.com/dariocpx/statu…). However, I realized that many didn't understand what I meant. Today, after $BABA's crash, it's time for me to explain. 🙏🏻

On August 10, 2022, Softbank announced the physical settlement of PREPAID FORWARD CONTRACTS (pic1) related to its $BABA shares. At that time, Softbank owned 23.7% of $BABA. When all these derivative contracts expire, they will be left with only 3.8% of $BABA shares.

What is a "Prepaid forward contract"? In this derivative, the buyer of shares (brokers in this case) pays IN ADVANCE to the seller (Softbank) the present value of the future sale price agreed upon. At that time, $BABA shares were trading at $100. So, thanks to this "trade," Softbank immediately booked a gain for the quarter since they were marking-to-market their $BABA holdings at ~$91 at that time. Furthermore, banks paid them a (badly needed) $11 billion in Cash (can you imagine that at that time $JPY was trading at 135 against $USD? 😆).

The overall gain for Softbank out of this whole masterpiece of financial engineering was ~$34 billion at that time. 👏🏻

⚠️ Important ⚠️

There is a small problem in this scheme. If the price of $BABA were to go up above the forward sale price, Softbank would be on the hook with its brokers to post more collateral and/or return some of the cash they got in advance. 😅

At that time, Softbank didn't close a single contract, but they agreed on multiple with many brokers on different maturities. By design, the longer the tenor of the forward contract, the bigger the discount applied to brokers and the lower the $BABA price above which Softbank would be on the hook.

Imagine for a second if the #stocks #FOMO would have bit $BABA like it happened to the #Mag7. That would have been a disaster for Softbank, right? Imagine if instead of trading at a 19 PE, $BABA would trade at a 117 PE like $NVDA does. Despite the economic struggles of China, Alibaba revenue growth still held up (chart1). So how come there is such a massive gap from US peers? Because no one, starting from Softbank, has an interest in squeezing this fallen angel😉. The chart of $BABA since the start of these forward contracts is pretty self-explanatory (chart2).

The obvious benefit for Softbank of Alibaba's price going down is even written black on white in their financial reports! (Latest one in pic4).

By the way, if you think Jack Ma is throwing in the towel and deciding to sell ~$850 million of his shares at these depressed prices, then you might want to have a look at how much margin lending $BABA founder and early investors got against their #Stocks. Jack Ma just got margin called, period. 🤷🏻‍♂️