Could Alibaba Stock Hit $200.00? It’s Possible
Chinese tech stocks were riding high last week. The biggest news of the day? Alibaba Group Holding Limited’s (NYSE:BABA) genius move to acquire all of Youku! will involve buying the remaining 72% stake in China’s YouTube, Youku Tudou Inc. (NYSE:YOKU), for $26.60 per American Depository Share (ADS). This is an over 30% premium on Youku’s pre-announcement closing price. Here’s why Alibaba stockholders should care.
What Does This Mean for Alibaba Stock?
The online digital media space is getting ripe as online behemoths continue to acquire smaller video streaming companies to tap into diversity. We’ve seen similar acquisitions in the past, when Alphabet, Inc. (NASDAQ:GOOG) acquired YouTube and e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) acquired video game streaming web site, Twitch.
Alibaba has likewise been moving strategically in the digital media industry, making well-calculated acquisitions one after another. We’re looking at a shift in its sales strategy as the company moves to fully claim an invincible position in the online Chinese media services industry. The company is building a monopoly over multimedia (web, mobile, TV) that will allow it to monetize visitors and create an interconnecting network with its core e-commerce business. Ingenious!
Here’s what the company skipper, Daniel Zhang, had to say on the acquisition:
“Digital products, especially video, are just as important as physical goods in e-commerce, and Youku’s high-quality video content will be a core component of Alibaba’s digital product offering in the future.”
Youku’s acquisition is Alibaba’s second big move in the said industry poised to return great value to Alibaba stock investors. Last year, Alibaba acquired majority stakes in ChinaVision Media and integrated it as Alibaba Pictures Group, which is currently the biggest film company in China. Earlier this year, Alibaba Pictures acquired the biggest cinema ticketing company in China, Guangdong Yueke Software Engineering Company, allowing Alibaba to use its software to get stats on viewers’ preferences.
Alibaba then moved on to launch its own Netflix-like service, Tmall Box Office (TBO), which allows users to stream content for a fee, both from international and local third parties, and also watch original content created by Alibaba Pictures.
It’s obvious that Alibaba realized just in time that the majority of viewers want to stream videos for free. What better way to bring them in than to target the biggest online streaming platform, Youku. This acquisition will compete with iQiyi, the second-biggest online streaming web site after Youku, which is owned by Baidu, Inc. (NASDAQ:BIDU), or China’s Google, as we like to put it.
Plus, the deal is also financially viable with hefty cash lying idle in reserves and a low debt burden on the balance sheet. While other companies are exploiting low interest rates to finance their unfruitful acquisitions, Alibaba stockholders should welcome the company’s move to fund the $3.6 billion acquisition with cash from its $17.0 billion reserves and acquire all of Youku’s outstanding shares to take it private. Smooth!
The Bottom Line on BABA Stock
Alibaba is building an economic moat that no other company will be able to beat—at least, in the near future. The company has now effectively eliminated threats from Netflix’s planned entry into the Chinese market.
The deal will make Alibaba the undisputed leader in China’s online media services space and I see great upside to the stock as the synergies start to flow through from the deal. When Amazon.com can trade over $500.00 with negative earnings, what’s stopping Alibaba stock from going over $200.00 with promising positive fundamentals?