Alibaba: Gathering The Pieces For A US Expansion?

| About: Alibaba Group (BABA)

Summary

BABA reported a 5.6% stake in GRPN in what I see is a move to expand its presence by focusing on building strategic stakes in similar businesses.

Positive for BABA as these stakes can be evaluated for potential M&A. Positive for GRPN as this investment underscores management execution and company's market position.

Remain bullish on BABA and GRPN.

Alibaba (NYSE:BABA) disclosed that it owns 33m shares of Groupon (NASDAQ:GRPN) at the end of Q4, which implies a roughly 5.6% in the company. GRPN's stock has reacted positively on this news with the stock up 79% since reporting a solid Q4 (see - Groupon: Finding Stability ).

Given that BABA is a long-term strategic shareholder with many of its assets, I view this investment to be a positive for both GRPN and BABA. For GRPN, counting BABA as a strategic shareholder implies a vote of confidence in GRPN's execution, management team and market leadership. More important, this could potentially be a potential set up of an outright acquisition by BABA, given BABA's familiarity over O2O and the group-buy business through its Koubei. As for BABA, the US expansion has always been part of its long-term plan. Strategic investment in GRPN and Jet.com are designed for BABA to 1) familiarize with the US market and 2) evaluate potential M&A opportunities for an eventual US expansion.

I remain bullish on both BABA and GRPN.

BABA's investment in GRPN comes as no surprise given GRPN's leadership in the group-buy space, which BABA has direct exposure of via its Koubei O2O platform. The 5.6% stake in GRPN is actually meaningless given it does not give BABA any control or influence over the strategic decision of the company. However, the stake does represent a good initial entry into the US group-buy space, allowing BABA to evaluate and get a better understanding of the US market dynamic and business model. In short, I believe that BABA's desire to enter the US is still very much alive and the company will continue to make strategic acquisitions across the US that is aligned with its own ecosystem.

With Jet.com aligned with e-commerce and GRPN aligned with group-buy, I believe that payment services such as PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) are potential targets, particularly PYPL given its potential becoming the next Alipay to rival Apple Pay or Android Pay by incorporating local merchant services and O2O. Food delivery is another potential area where BABA may be interested, but the competitiveness and high cash burn-rate will keep BABA on the sidelines for at least another year or so. As the market becomes more rationalized, DoorDash or Grubhub are attractive candidates for BABA given its similar business model to Ele.me (see - Alibaba: Doubling Down On Food Delivery).

In short, I remain bullish on BABA and continue to like its strategy of making strategic acquisitions that could ultimately enhance its ecosystem and global expansion. I think GRPN's recent share price appreciation is warranted given its growth outlook and strategic value, although I do feel that the stock has had its run and would recommend investors to take profit. However, I would get more constructive at 20x 2017E PER.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.