For months, skeptical investors have been questioning the veracity of Alibaba’s financial reports, essentially alleging that the numbers seem too good to be true, and even accusing the Chinese e-commerce giant of being a fraud.
Much of their argument has relied on their sheer disbelief, or unwillingness to believe, that Alibaba (baba) could receive more orders and ship many more packages than U.S. companies like Amazon (amzn) and UPS (ups), with many fewer employees on their payroll. Those critics have been buffered recently by revelations that Chinese government officials actually did fake some economic data, provoking suspicions, and stereotypical assumptions, that inflating numbers might be business as usual in that country. Alibaba has defended its numbers, explaining that China is just a very different market than the U.S.—to start with, it’s more than four times as large.
But this week, one skeptic, an Ohio insurance agent Bob Wittbrot who has been trying to discredit Alibaba on his anonymous investing blog titled Deep Throat since shortly after the company went public, highlighted an irregularity at the company that seems to hold water. Alibaba is paying its employees a whole lot in stock compensation—awards given to employees for joining the company and as annual performance bonuses—and those payments are increasing much faster than the company’s headcount, and even faster than its revenue is growing.
In the nine months through December 2015, Alibaba’s revenue increased 31% over the prior year period. At the same time, the amount it paid out in share-based compensation jumped more than 37%, to $1.78 billion. The increase wasn’t because the company had a bunch of new hires to which it owed bonuses: Alibaba’s workforce only grew 6% over the year before, to 36,465 employees.
Of Alibaba’s $11.9 billion in revenue during those same three quarters, almost 15% of which went to stock-based compensation. Compare that to Amazon, which spent less than 2% of its $107 billion in revenue on stock compensation in 2015, a total cost of $2.1 billion. And while Amazon’s stock-based compensation expenses increased 42% last year, its workforce expanded 50%, to 230,800 people—or more than six times the size of Alibaba’s employee base. (Over the final nine months of the year—the period comparable to the one Alibaba just reported on—Amazon’s headcount increased 40% while its stock compensation increased 46%.)
Stock compensation is theoretically awarded in order to incentivize employees, who will be rewarded more if the company’s stock price rises. Amazon workers got the benefit of that last year, as the company’s share price rose 118% in 2015, nearly triple as much as its stock compensation expenses grew. But Alibaba’s shares fell nearly 22% last year after a few disappointing results, and declined more than 1% during the nine-month period on which it just reported.
The Deep Throat blog noted that Alibaba’s stock-based compensation expenses were the equivalent of $49,000 per employee last quarter, a 28% increase from the per-employee award year before. “Finally, where do I get an employment application?” Wittbrot wrote sarcastically.
That calculation is somewhat misleading, though, because not all of Alibaba’s stock-based compensation went to its own employees; some went to the employees “and other consultants” of Ant Financial, the online payment processor (formerly known as Alipay) affiliated with the company and led by Jack Ma, the founder and chairman of Alibaba itself. (Alibaba is not only paying Ant Financial employees with its own stock, but also compensating its own employees with Ant Financial stock, all of which adds up to its total share-based compensation expenses.) Including only the Alibaba stock the company gave to in-house employees, it paid about $11,134 per person in the latest quarter, a 6% bump in bonus pay per head compared to the year before, which is still more than double the average American’s raise last year.
Indeed, the biggest pay hikes seem to be in the amount of Alibaba stock awarded to company employees, which rose 14% in the quarter from the prior year. The sum increased 18% over the previous quarter, even though Alibaba’s staff shrunk by about 200 employees in the meantime. (And during that previous quarter, those awards had jumped even more, 22% over the prior year).
Alibaba, for its part, says it is awarding stock compensation to its employees at a fairly consistent and modest rate, and it didn’t hire any high-ranking executives in particular last year whose pay packages would have skewed the numbers higher. Rather, the double-digit increases in Alibaba stock compensation to its own employees could have been affected by complex accounting for when the stock awards vest. And Alibaba says that the total value of the stock compensation it awarded to employees last quarter—including both Alibaba stock and Ant Financial stock—actually decreased on a per-head basis from the year before.
Still, it’s hard to see why Alibaba’s overall share-based compensation expenses increased 37% in the last nine months of 2015 over the year before, outpacing the cost increases in each of the last two quarters. The reason for the cloudiness is that Alibaba only started breaking out the stock comp it pays to its own employees versus what it pays to Ant Financial’s two quarters ago, after the spring quarter when bonuses are typically awarded.
This matters, because without the breakdown it’s not clear whether a certain factor is responsible for the increases: Market movement in the stock prices themselves. Alibaba marks the value of its stock awards to Ant Financial employees, as well as the value of Ant Financial stock awarded to its own employees, up or down depending on the market price for each at the end of the earnings period. But the value of the Alibaba stock the company gives its own employees, which makes up the majority of its stock compensation expenses, is not adjusted to reflect the current market value. Since Alibaba’s stock fell last year, which would have lowered what it pays in overall stock comp, there are only two possible explanations for why the expenses actually jumped so much: Either Ant Financial, a private company that is not listed on a stock exchange, surged in value (as deemed by Alibaba accountants)—or Alibaba’s stock compensation grants actually increased throughout the year even more than we yet know.
Based on the amount of information that Alibaba is handing out now, it’s just too hard to tell.