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Alibaba: Ecosystem Stronger Than Ever

Summary

BABA's acquisition of YOKU is a key positive as it further strengthens its ecosystem on the media production and distribution side.

However, this is a negative to BIDU whose ecosystem is falling further down the pecking order.

Remain bullish on BABA. WB could get interesting as a takeout candidate. Reiterate bearish view on BIDU.

Alibaba (NYSE:BABA) remains my top pick among the three Chinese large caps, with the other two being Baidu (NASDAQ:BIDU) and Tencent (OTCPK:TCEHY). Friday's acquisition of the remaining Youku (NYSE:YOKU) stake sends a clear signal to the market that BABA is focused on creating its own unique ecosystem rather than being a pure e-commerce play. The $26.60 offer made for YOKU values the company at 3.5x forward sales, which compares favorably against global peers such as Netflix (NASDAQ:NFLX) which trades at 6x and EROS at 5x forward sales.

The acquisition is accretive to BABA in terms of sales, giving the e-commerce giant a leading position in the fast-growing online video segment. However, given YOKU's losses for the past several years, near-term restructuring of YOKU's business (i.e. cost cutting) will likely weigh on BABA's earnings. The stock has had a great run, up 25% since hitting the lows of $58, so there could be some profit taking as the street digests this acquisition. Nonetheless, I continue to like BABA's story in the long term and it will remain my favorite relative to Tencent, whose WeChat monetization is still unproven and less material, and BIDU, whose near-term...


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