Alibaba Group Holding Ltd.(BABA), the Chinese e-commerce giant ushered by billionaire Jack Ma, a ten time reject from Harvard university, has agreed to buy a minority stake in domestic smartphone maker Meizu for $590 million.
However, the companies did not disclose how large the “minority” stake would be.
The deal will combine Meizu’s hardware and Alibaba’s mobile operating system, YunOS. Alibaba will use its e-commerce resources to help Meizu vend its products.
With its two sites Taobao Marketplace and Tmall.com, Alibaba is China’s foremost online retailer. But as the Chinese population is increasing its reliance on their smartphones to go online, the company has made an effort to build its very own mobile operating system to popularize its Internet services.
YunOS
Created over three years ago, YunOS is a Linux-based operating system (OS) that Alibaba developed to promote the company’s e-commerce services. The software, however, has struggled to draw well-known hardware vendors.
To expand YunOS, Alibaba has been making an effort to get well known Chinese handset makers to use the software. So far, Meizu has been the most noteworthy brand. In October, Meizu rolled out phones installed with its OS.
Meizu does not feature in the list of the top five smartphone vendors in China. However the company has its own fan base. Meizu has been contending against Xiaomi, Lenovo and Huawei and rolled out its latest flagship phone, the MX4, priced at US$292 last month.
Our Take
In 2010, Apple (AAPL) founder Steve Jobs sent an email to his top 100 senior executives. In it, he wrote that the 2011 would see a 'Holy War' between Apple and Google (GOOGL).
We believe that if Jobs were to draft this email at present, the “Holy War” would include a third company, Alibaba. In its first quarterly earnings call after its record breaking IPO in September, Alibaba Executive Vice Chairman Joe Tsai said that the company intends to develop its OS further. However, he called this a “long-term” effort. He said “The dominant player today may not be the dominant player tomorrow,” – referring to Google’s Android.
A few small manufacturers have used YunOS before. Shenzhen Sang Fei Consumer Communications Co. makes phones running the operating system under the Philips brand. Li of RHB is of the opinion that “This isn’t too big an investment,” He believes that Alibaba will make similar investments in the future, as it goes deeper into the smartphone business.
Alibaba currently holds a Zacks rank#3 (Hold). Investors can also consider PetMed Express, Inc. (PETS), as it holds a Zacks Rank # 1( Strong Buy).
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