Disney (DIS) and Alibaba (BABA) stock both jumped 3% on Tuesday after the pair announced a partnership that could end up being a huge deal.
Based on the stock reactions, it appears that Wall Street sees near equal upside for both companies. However, one stock certainly looks superior to the other.
BABA is the e-commerce king of China. Its business-to-consumer site Tmall controls 60% of a Chinese B2C market that’s expected to grow 64% this year, 43% next year and 34% in each of the years thereafter.
Tmall acts almost like an online mall where brands have their own page, and consumers can visit the page to make discounted purchases.
DIS will now be joining the Tmall network with a product called DisneyLife. Using DisneyLife, Tmall shoppers can pay $125 and access Disney streaming content and plan visits to the company’s Shanghai and Hong Kong theme parks.
Essentially, this move gives DIS a larger outlet to drive content and theme park revenue higher in the Chinese region.
Alibaba or Disney Stock: Which Benefits More?
At first glance, it certainly seems that DIS has the most to gain from this new partnership. According to BABA, it has 367 million active buyers, and that’s a user base that DIS is now exposed to after this partnership.
BABA’s active buyers account for most of the 374 million total online shoppers in China, suggesting that those who shop online in China use BABA platforms. Given that just one-third of China’s population are considered e-commerce active users, there is still great upside for BABA’s network to grow larger.
With DIS charging $125 a pop, it certainly seems that Disney can drive its revenue much higher in China as a result of this new deal, which bodes well for Disney stock.
That said, it should be noted that DIS already has a big Chinese presence. Its “Avengers: Age of Ultron” blockbuster generated $210 million in Chinese sales just two weeks after its theater release. Therefore, DIS may produce higher content revenue as a result of its popularity in the region, but it is not as if DIS is new to the people of China.
That’s why I think BABA has the most to gain from this deal with DIS long term.
Over the last year, BABA has worked hard to bolster its media portfolio, and it is well on its way to dominating the streaming and media market in China. Just recently, BABA spent $266 million to buy Hong Kong’s South China Morning Post. It also invested in Paramount Pictures through its Alibaba Pictures unit and bought Youku earlier this year, the equivalent to Netflix (NFLX) in China.
What BABA just did was gain access to DIS content, which is the quintessential gold standard in worldwide content. This will likely trickle down to BABA’s Youku video offerings and also paves the way for future box office dealings with Alibaba Pictures Group.
Therefore, BABA has a lot to gain from this deal, and on top of that, it increases Tmall’s appeal for DIS lovers who may shop at competing sites like JD.com (JD). As a result, there could be some gross merchandise volume advantages for BABA stemming from the DIS deal.
Last Thing to Consider
The question of who benefits more from this deal is speculative; more a matter of opinion at this point in time. However, the question is which stock is best suited following this deal, and to answer that question one must look at the businesses as a whole, not base the decision from one partnership.
Fact is that Disney stock trades at nearly 19 times next year’s earnings, and is expected to grow 6.8% over the next year. BABA will grow 4.5 times faster, yet its price-earnings ratio is just 25% more expensive. Therefore, Alibaba stock looks superior to DIS, with the company growing much faster at just a slight valuation premium.
While there are concerns about a slowing Chinese economy, DIS has its own problems with subscription losses in ESPN, along with higher costs and a talent drain at the network. With all things being equal, Alibaba stock looks to have more long-term upside from this point forward.
As of this writing, Brian Nichols was long BABA.
