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Alibaba to Grow in Southeast Asia with $1B Lazada Investment

According to Reuters, Alibaba Group Holding Ltd. BABA has agreed to pay about $1 billion for a controlling stake in the online retailer, Lazada, marking its biggest overseas investment so far.

Headquartered in Singapore, Lazada is a Southeast Asian e-Commerce company founded by Rocket Internet in 2012. The company works with third-party players and develops its own logistics to improve goods delivery. It operates retail websites in Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines.

For the first nine months of 2015, Lazada’s revenues surged 81% to $190.0 million, while active customers more than tripled to 7.3 million. For 2014, Lazada recorded net revenue of $154.3 million, up 104.4% from $75.5 million in 2013. However, net operating losses were $152.5 million, wider than a loss of $67 million in the prior year.

Why Lazada?

Historically, Southeast Asian countries have attracted investors from across the globe thanks to solid growth rates, booming populations and generally good governance.

Through the investment in Lazada, Alibaba will gain entrance into a nascent but very populous online retailing market with a population of 560 million. According to consultancy firm Frost & Sullivan, the e-Commerce market for business-to-consumer sales across Indonesia, the Philippines, Singapore, Malaysia, Vietnam and Thailand was just $10.5 billion in 2015, or 1.5% of total retail volume.

Therefore, the fact that the South East Asian e-Commerce market is still at a nascent stage is a huge advantage for Alibaba.

Also, Alibaba is dependent on China for the major portion of its business where growth has already reached its peak. In the last three months of 2015, the total value of goods transacted on the company's e-Commerce sites witnessed the slowest annual growth rate in more than three years.

So this investment comes at an opportune time. The deal is in line with Alibaba’s Chairman Jack Ma’s goal of getting at least half the company’s revenues from overseas over the next few years. The Lazada deal will expand its sales in six Southeast Asian markets.

Not only Lazada, the Chinese company also has a stake in the logistics firm Singapore Post Ltd.
With this and other investments, Alibaba will likely be able to establish a beachhead in the emerging e-Commerce markets of India and Indonesia, to name a few. The markets are growing quickly, but e-Commerce still has relatively low penetration rates.

Alibaba’s President Michael Evans said in a statement, “Globalization is a critical strategy for the growth of Alibaba Group today and well into the future... With the investment in Lazada, Alibaba gains access to a platform with a large and growing consumer base outside China, a proven management team and a solid foundation for future growth in one of the most promising regions for eCommerce globally”.

To Conclude

Alibaba has been focusing on both developing and mature e-Commerce markets outside China where it already has 80% share.

In this regard, Alibaba has been investing in relatively nascent and growing markets like India and other untapped South Asian markets.

Getting in early will enable the company to take share, thus generating higher revenues and profits.

Alibaba has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same space are Travelport Worldwide Limited TVPT, Inc. STMP and Groupon, Inc. GRPN. While Travelport and sport a Zacks Rank #1 (Strong Buy), Groupon has a Zacks Rank #2 (Buy).

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STAMPS.COM INC (STMP): Free Stock Analysis Report
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