At first blush, the purchase by Alibaba Group Holding Ltd (NYSE:BABA) of Moneygram International Inc (NASDAQ:MGI) doesn’t seem like a huge deal for BABA stock. Alibaba affiliate Ant Financial is paying $880 million for MGI, after all. Yet, Alibaba stock is worth nearly $250 billion — almost 300 times the acquisition price.
I wouldn’t dismiss the deal as “minor” so quickly, however. While the purchase price isn’t high, and the near-term impact on BABA stock is likely minimal, Moneygram highlights the long-term strategy and potential for Alibaba.
The bull case for Alibaba stock has two major pillars: First, the company can move beyond China to being a worldwide player and a legitimate competitor to Amazon.com, Inc. (NASDAQ:AMZN). Second, like Amazon, Alibaba can move from its e-commerce roots into all sort of profitable efforts.
The Moneygram acquisition scores well on both counts. Alibaba continues its push into the West. And, through the tie-up of Ant Financial and Moneygram, it continues its entry into the potentially lucrative digital banking and payment services markets.
Strategically, the deal lays the groundwork for further growth of BABA stock — and at a very reasonable price. Investors shouldn’t dismiss the deal simply because the price doesn’t seem high enough to matter.
Alibaba Stock Needs International Growth
At the moment, Alibaba’s business still relies on Chinese e-commerce. In the company’s third quarter (ending Dec. 31), China commerce generated 80% of revenue, with ~96% of that figure coming from retail. Other businesses, including cloud computing and entertainment, make up the other 20%. But, those businesses remain unprofitable; Alibaba earnings remain dependent on Chinese commerce. That’s a bit of risk on its own, given concerns about the Chinese economy.
Ant Financial isn’t consolidated onto Alibaba’s P&L, and at the moment, BABA has a profit-sharing agreement and could take up to one-third of Ant’s equity in an IPO. But, even that minority ownership means Alibaba can use Ant Financial as an entrance into international markets, and that’s where Moneygram fits nicely.
To begin, Ant can target Chinese expatriates in the U.S. and elsewhere. Ant already has joint ventures and partnerships worldwide, and Moneygram further supports its payment infrastructure. Plus, Alibaba’s other offerings such as e-commerce, entertainment and even cloud services, can follow Ant’s lead.
At a valuation of nearly $250 billion, Alibaba stock probably can’t hold up on the Chinese market alone, considering the sheer size of that market. There are too many concerns about the macro environment in that country. Internet and e-commerce penetration is increasing, but still low relative to developed countries. Every step Alibaba takes toward becoming a legitimate international presence — and a real competitor to Amazon — supports the bull case for BABA stock.
The Moneygram purchase is actually a big step in that direction.
Alibaba Isn’t Just a Retailer
It’s hard to imagine what Amazon.com might look like had the company decided to be “only” an e-commerce retailer. It’s almost certain that AMZN stock would trade well below its current levels of approximately $840 per share.
Alibaba has certainly learned lessons from its American peer. It’s moved into cloud as well, where the company has built a viable business with worldwide aspirations. Now, Alibaba is looking to Hollywood for growth.
Further, the company has the infrastructure for a worldwide payments business, at a time when the future of that industry is in serious flux. That’s a significant opportunity for BABA stock, even for a company the size of Alibaba’s, and even with the company owning only a portion of Ant Financial.
That’s not to suggest that Ant is the next Visa, or even the next Paypal. But, Ant’s efforts in payment services can move the needle for Alibaba stock, even given BABA’s $250 billion valuation. Plus, Visa and Mastercard don’t have the added luxury of using a payment services platform to grow retail sales.
All told, I continue to believe that BABA stock is undervalued. I don’t know that the Moneygram acquisition changes that dramatically in the near term, but it highlights the potential of the long-term strategy here. Owning a Chinese e-commerce retailer might seem to have a lot risk at the moment, but Alibaba isn’t just a Chinese e-commerce retailer anymore — and that’s good news for BABA stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.