Alibaba: Making A Play In Overseas Payments?

| About: Alibaba Group (BABA)

Summary

Media reported that BABA could be interested in a stake in German-based Wirecard.

No official release and both companies have not confirmed, but such strategic investment is logical given the overseas opportunity.

WeChat payment is a long-term threat to BABA’s Alipay, which makes overseas diversification a priority.

Media reported that Alibaba's (NYSE:BABA) Alipay is looking to acquire a strategic stake in Wirecard AG up to as much as 25%. Wirecard stock reacted positively on this news, but Ant Financial came out with a statement denying the investment and instead pointed out that Jack Ma works with various partners across Europe to promote mobile payments for Chinese tourists. My view is that there is certainly some truth in BABA looking to invest in overseas companies given its prior investment record and the desire to expand its payment network. Wirecard gives BABA valuable insight to German technology, which could be used as it expands its mobile payment network across the world. This is especially important for BABA given the increasing competitive threat from Tencent's (OTCPK:TCEHY) Wechat Payment, which is evolving into an ecosystem of its own. Where BABA has an inherent advantage is the capital for overseas expansion to offset the potential market share erosion in its domestic market. BABA remains my top pick among the large-cap Chinese internet stocks, followed by Tencent and Baidu (NASDAQ:BIDU).

Although BABA came out denying the talk, Wirecard confirmed that the company is speaking with various strategic partners. Media speculates that one of the partners is Ant Financial, which has the interest in acquiring German expertise while Wirecard securing a large strategic shareholder may mitigate the recent short-selling it has been experiencing. In my view, the basis for any overseas investment would require several criteria such as prior collaboration, similar business models and the ability to fill a need be it global expansion or R&D. in this case, Wirecard fit the criteria in that Ant Financial and Wirecard went into a partnership to provide mobile phone payment services for Chinese tourists in Europe. In addition, the rising Chinese tourism in Europe allows BABA to expand its payment footprint in the continent, where it will compete directly against Apple (NASDAQ:AAPL) and Android Pay.

Wirecard is a software and IT company that focuses on electronic payment transactions and retail payment processing and platforms. The company was founded in 1999 and has presence in EMEA, APAC ex-China, Turkey, South Africa and Australia-New Zealand. It offers customers a one-stop-shop for payment services for retail, services and banking clients with solutions in payment (PC and mobile), risk management, card technology, payment systems and other value-added services. For instance, Wirecard's Multi-Channel Payment Gateway is linked to 200 international payment networks and acquiring acceptance through Wirecard Bank and global banking partners. In addition, Wirecard provides country-specific payment and ebit system as well as industry-specific access solutions such as bank settlement plan or data encryption. In short, a proven and comprehensive platform that BABA will certainly find useful as it expand its payment network.

I believe that overseas payment is an area where BABA could be looking to conduct M&A or strategic investments as China's domestic market is becoming increasingly competitive with WeChat building its own payment ecosystem that could take share away from BABA. Where BABA differentiates is its diversified portfolio in overseas markets due to its prior acquisitions. This allows the company to be better positioned on a global level relative to Tencent whose Wechat is predominantly used by the Asian community.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.