Alibaba Group Holding Ltd (BABA) Takes Huge Stake in Wal-Mart Stores Inc (WMT) Competitor

Wayne Duggan

Alibaba Group Holding Ltd (NYSE: BABA) has made another huge deal as part of its aggressive push into the brick-and-mortar grocery business.

Just five months after Amazon.com ( AMZN) announced a $13.7 billion buyout of Whole Foods, Alibaba has announced a new $2.9 billion stake in Sun Art Retail Group, which operates the largest chain of hypermarkets in China.

[See: 7 of the Best Stocks to Buy for 2018.]

Sun Art operates roughly 400 hypermarkets, which are a combination of supermarket and department stores similar to the Wal-Mart Stores Inc ( WMT) supercenters. Alibaba will now hold a 36 percent ownership stake in Sun Art as it looks to expand its massive e-commerce operation to the offline market, which currently accounts for about 85 percent of total retail sales in China. French retail company Groupe Auchan SA also holds a 36 percent stake in Sun Art.

"Physical stores serve an indispensable role during the consumer journey, and should be enhanced through data-driven technology and personalized services in the digital economy," Alibaba CEO Daniel Zhang says in a statement.

American investors may see Alibaba's supermarket push as a response to Amazon's grocery store strategy. In reality, the latest deal is part of a multi-year strategy of buying up grocery stores, shopping malls and department stores as part of Alibaba's "new retail" initiative.

[See: Chinese ETFs: 9 Ways to Play the Middle Kingdom.]

Investors sent Alibaba stock higher by 1.8 percent on Monday, but Walmart stock dipped 1 percent on the threat of even more competition from Alibaba in China. Walmart currently owns roughly 10 percent of hypermarkets in China.

"Alibaba and Sun Art are forming a strong alliance: China's dominant e-commerce giant and its best hypermarket operator," says OC&C Strategy Consultants associate partner Veronica Wang, according to Bloomberg.

"They can leverage the alliance and bring more benefits than Walmart and JD ( JD)."

Alibaba stock has been on a tear on 2017, surging 114 percent while the company has consistently reported revenue growth above 40 percent. MKM Partners senior analyst Rob Sanderson says that even after the huge run, there is still value in Alibaba stock. "We continue to see considerable value in the [sum-of-the-parts] and think that continued strength in commerce is the catalyst for unlocking value," Sanderson says.

MKM Partners has a "buy" rating and $220 price target for BABA.

Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.