It was announced early Monday morning that Chinese e-commerce giant Alibaba (BABA) plans to invest as much as $4.63 billion into Suning Commerce Group, a brick-and-mortar consumer electronics retail sales chain.
According to the Wall Street Journal, the move is part of an ongoing push by China’s e-commerce companies to pull in smartphone users across the country.
The $4.63 billion investment will give Alibaba a 20% stake in Suning, and in exchange, Suning has agreed to invest $2.3 billion in BABA stock, which equates to a 1.1% stake.
Suning will begin selling Alibaba products in its brick-and-mortar shops and will open its first online store using the BABA Tmall platform. Additionally, Suning’s rather impressive distribution system will become part of Cainiao, Alibaba’s existing logistics network.
Soon, Suning’s system will participate in transport and delivery of Alibaba-based orders for products from multiple vendors and merchants. According to CNBC, Suning’s existing network covers more than 90% of the country, and with the inclusion of BABA’s logistics units, all 2,800 Chinese districts will be accounted for.
What Could This Mean for BABA Stock?
In short, the partnership looks to have solid potential for both companies, yet the scales seem to be tipping more in favor of Alibaba than Suning. While Alibaba dominates e-commerce in China, the arrangement with Suning should further secure its position with improved logistics and delivery systems.
With nearly $126 billion in cash, $76 billion in revenue, and $24 billion in net income, spending $4.63 billion for access to Suning’s distribution network — which is apparently capable of delivering orders in as little as two hours — is a mere drop in the bucket for Alibaba.
Plus, with a new presence in the brick-and-mortar electronics retailer’s physical storefronts, Alibaba gains clear advantage over other e-commerce competitors. As the Wall Street Journal explains it:
“They will also look for ways to combine Suning’s more than 1,600 physical stores with the services Alibaba and its affiliates can provide on mobile apps, such as ordering and payments. Suning’s thousands of after-sales service centers across the country would also be able to cater to Tmall consumers’ repair and maintenance needs.”
Assuming things pan out, BABA stock could see a noticeable bump if sales improve thanks to better delivery times and smoother distribution logistics. Together with Suning, Alibaba will be able to quickly deliver orders to customers in even the most remote regions of China, and that fact alone is likely to pull customers from other e-commerce rivals.
Bottom Line on Alibaba and Suning
Wall Street reacted positively to Monday’s news of a partnership between Alibaba and Suning, with shares of BABA stock jumping as much as 4% to trade near $81. The arrangement has potential to give BABA stock a much-needed boost, as the Chinese e-commerce giant has struggled so far this year, with shares down more than 22%.
Results of Alibaba’s cooperative new relationship with Suning won’t be immediately visible, as the company is scheduled to report earnings later this week for the first quarter of fiscal year 2015. The benefits of utilizing Suning’s logistics network and physical presence to attract new customers will remain a mystery until at least October or November, when BABA stock earnings for Q2 are reported.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.
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