This week Alibaba Group Holding Ltd (NYSE:BABA) announced a strategic venture with LendingClub Corp (NYSE:LC), that will leverage its online lending platform for financing international transactions. So far, Wall Street has given much more favor with Lending Club stock as it jumped over 5% on the news. However, BABA stock barely moved initally, then fell 3% by the end of the week.
Well, first of all, let’s take a look at the details on the deal: It’s a multi-year arrangement where Lending Club will be the exclusive facilitator of loans to small businesses to make wholesale purchases of goods from Alibaba.com. The amounts will range from $5,000 to $300,000 per merchant.
No doubt, the ultimate success of strategic ventures can be dicey. Both parties must devote time and resources to get things done. There also needs to be a focus on marketing.
As for the joint venture between the Lending Club and Alibaba, there are certainly some initial hurdles. By calling it “Alibaba.com e-Credit Line powered by Lending Club,” there already seems to be terrible branding at work. Could a worse tagline have been dreamed up? I really don’t think so.
But for LC stock, the outcome of the joint venture is probably not critical. Instead, it is more strong evidence of the inherent power of the company’s core platform. Let’s face it, Alibaba could select any vendor. But the company chose the Lending Club because of the top-notch technology, a quick application process, strong underwriting capabilities and low-cost offerings for merchants.
At the same time, the Lending Club joint venture points to the potential massive opportunity in foreign markets. Keep in mind that the company is primarily focused in the U.S. But now with the help of Alibaba, Lending Club can capitalize on the enormous footprint, which includes 265 million mobile users and 334 million active buyers.
OK, so does this mean you should rush to buy LC stock? Not really.
Even though the growth opportunity is large and the company has a dominant position in its market, the fact is that the valuation is still out-of-whack. This should not be a surprise since the company recently came public with lots of fanfare.
Right now, LC stock trades at a price-to-sales ratio of about 41X! To put this into perspective, other online marketplaces, like eBay Inc (NASDAQ:EBAY) and HomeAway, Inc. (NASDAQ:AWAY), have multiples in the range of 4X to 6X.
Rather, the better play for investors looks to be BABA stock. The joint venture with the Lending Club highlights the massive potential for international wholesale revenues, which remain only about 5% of overall business. But within five years or so, the market could balloon to $291 billion.
Given Alibaba’s long-history with facilitating foreign transactions — and its ecosystem and infrastructure assets — the company is in a strong position to benefit.
True, BABA stock got hit recently because of a fouth-quarter earnings report that was below expectations. But the company still posted a sizzling 40% spike in revenues. Oh, and BABA has been making an effective transition to mobile, which now represents about 42% of total business.
Besides, the valuation on BABA stock does look attractive, with a forward price-to-earnings ratio of 32X. In comparison, Amazon.com Inc. (NASDAQ:AMZN) has a multiple of 160X and JD.com, Inc.’s (NASDAQ:JD) is nearly 900X (the company is Alibaba’s biggest rival in China).
So again, the deal between Alibaba and LC is really just a way to get a sense of the opportunities of both companies. All in all, there should be lots of money made from Internet-based foreign trade.
But when it comes to trading on the news, the best bet looks like BABA stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.