BABA Stock: This Deal Could Be Big for Alibaba Group Holding Ltd

BABA StockMore Upside for BABA Stock?

Alibaba Group Holding Ltd (NYSE:BABA) stock is down about 15% since its initial public offering (IPO), but its latest move may turn its fortune around. The Chinese e-commerce giant is now trying to become a global giant by betting big on Southeast Asia. That could be huge for BABA stock.

On Tuesday, Alibaba announced that it has agreed to purchase a controlling stake in Southeast Asian retailer Lazada Group for $1.0 billion. Lazada operates online retail stores in Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

This is Alibaba’s largest acquisition ever, and it gives the company access to a large and growing consumer base outside of China, where most of its revenue comes from. The stake in Lazada is also a claim to revenue that more than doubled in 2014, up to $154.3 million.

Alibaba will pay $500 million for new shares in Lazada, while the remaining $500 million will purchase an equal amount from each of the existing investors, including Germany’s Rocket Internet SE, British supermarket chain Tesco PLC, and Investment AB Kinnevik.

The purchase lets Alibaba tap into a market with huge growth potential. Southeast Asia’s gross domestic product (GDP) is expected to grow at an average annual rate of 5.4% per year until at least 2018. (Source: “Economic Outlook for Southeast Asia, China and India 2014,” OECD Development Center, last accessed April 13, 2016.)

The Southeast Asian online market doesn’t have a single dominant player yet, but Alibaba does have its work cut out for it. Many countries in the region lack sufficient transport and payments infrastructure that is so crucial to the success of an e-commerce firm that needs to process and deliver orders.

In a country like Indonesia, for example, Alibaba will have to contend with delivering packages to dozens of islands via antiquated seaports and run-down roads.

“Overseas expansion requires a lot of investment in logistics, it would take Alibaba much longer to build the business from the ground up,” said RHB Research Institute analyst Li Yujie. “What Alibaba could do is integrate the businesses and introduce more existing merchants to Lazada to export their products overseas. (Source: “Alibaba Expands in Southeast Asia With $1 Billion Lazada Deal,” Bloomberg, April 13, 2016.)

Nevertheless, there is lots of room for Alibaba to grow sales in the region. The e-commerce sales were only $10.5 billion in 2015, or just 1.5% of total retail volume, according to research firm Frost & Sullivan. (Source: “Alibaba buys control of Lazada in $1 billion bet on SE Asia ecommerce,” Reuters, April 13.) By comparison, e-commerce sales account for 12% and eight percent of all retail in China and the U.S., respectively. (Source: Ibid.)

Alibaba is also making headwinds in claiming stakes in companies in other areas around the globe.

In February, Alibaba bought 33 million shares of daily deals website Groupon Inc (NASDAQ:GRPN) for a 5.6% stake in the company. The stock purchase amounted to about $100 million and gives Alibaba access to the U.S. e-commerce market that connects merchants with consumers. Alibaba is also using its own AliExpress web site to target buyers in emerging markets such as Russia and Brazil.

Alibaba founder and Chairman Jack Ma has set a goal of getting at least half of the company’s revenue from outside China. International revenue only accounts for seven percent of Alibaba’s total revenue, but the Lazada deal is an obvious step in the right direction to boosting that metric.

The Bottom Line on BABA Stock

BABA stock may not have done much since its IPO, but the company is clearly making efforts to change that by expanding internationally. The Lazada deal is Alibaba’s first major stake in an overseas company and probably not the last. Over the long term, that should be a big catalyst for BABA stock.