Alibaba Group Holding Ltd (NYSE:BABA) stock, for the first time in months, looks like a screaming buy after its recent decision to invest $590 million into the rapidly growing Chinese smartphone-maker Meizu.
If this investment truly coincides with BABA stock forming a bottom, it’ll be welcome news for shareholders, who have seen Alibaba fall 25% in the last three months alone — a period in which the S&P 500 actually ticked up about 1%.
Why has BABA stock been such a poor performer recently? Well, when you combine a recent $200 million revenue miss with allegations from the Chinese government that BABA is hawking fake goods on its sites, you’ve got a recipe for disaster.
Thankfully, Alibaba CEO Jack Ma is staying focused on the future, and the $590 million that BABA just plowed into Chinese smartphone maker Meizu should do wonders for investor sentiment and the Alibaba stock price. Here’s why.
Meizu Smartphones: The Hardware Alibaba Needs
Mobile is the most important catalyst fueling BABA’s remarkable growth. InvestorPlace’s Dan Burrows says about the most recent quarter:
“Mobile continued to charge ahead. Mobile transactions accounted for 42% of all transactions in the most recent quarter, up from 36% last quarter and 20% a year ago. The number of active mobile users grew to 265 million from 217 million a quarter ago, and 136 million a year ago.”
With those numbers in mind, it’s not hard to understand why BABA would want to focus resources on its mobile efforts. By buying a stake in Meizu (the percentage of the stake is unknown), Alibaba now owns a piece of some hardware it can marry to its fledgling mobile OS, YunOS.
Doubling up on the hardware and software sides of the smartphone economy can be enormously lucrative. Just ask Apple Inc. (NASDAQ:AAPL), which just logged the most profitable quarter ever as earnings came in at $18 billion. Of course, the other natural comparison to BABA’s Meizu move is Amazon.com, Inc. (NASDAQ:AMZN) and its eponymous Fire Phone, which became an instant punchline when, a month after its debut, the Amazon Fire Phone had sold a measly 35,000 units.
But Alibaba’s $590 million investment in Meizu differs from both of the aforementioned cases: BABA isn’t close to being a hardware company on the level that AAPL is, and its software is little-known to boot. And importantly, Alibaba isn’t trying to diversify into smartphones all by itself — unlike Amazon, it’s doing so through acquisition.
While the Meizu play won’t send BABA stock rocketing higher immediately, it’s a great long-term play and it shows Alibaba’s commitment to mobile. And although Meizu reportedly owns less than 2% of the Chinese smartphone market, the company is growing like wildfire. Meizu sold 1.5 million smartphones in January — a whopping 50% more than it did the month before.
Just as Yahoo! Inc. (NASDAQ:YHOO) reaped the rewards from its early investment in Alibaba, perhaps Alibaba is now seeking a young cub of its own.
After this move, BABA stock is a definitive buy at these depressed levels.
As of this writing, John Divine held shares of AAPL stock. You can follow him on Twitter at @divinebizkid.
