Updated to include additional analyst comments.
The Chinese e-commerce giant announced Tuesday that it has acquired a controlling stake in Lazada for about $1 billion. It will buy around $500 million in newly-issued equity capital and also acquire shares from certain existing shareholders.
The firm anticipates the deal will help brands and distributors better access the Southeast Asian consumer market where Lazada currently operates: Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
According to the acquisition announcement, the markets served by Lazada have a combined population of 560 million and an estimated internet user base of 200 million, with only 3% of the region's total retail sales conducted online.
"Southeast Asia is an attractive mobile-driven consumer market that is highly fragmented and diverse with significant barriers to entry and a nascent modern retail sector that has large headroom for growth," said Max Bittner, CEO of Lazada Group, in a statement.
The transaction serves to remind onlookers that Alibaba's geographic strategy has to do with emerging markets in Southeast Asia primarily, explained Gil Luria, an analyst at Wedbush Securities.
"While they've made some small investments in the U.S. in a variety of companies, the real acquisition they're making is of an e-commerce platform in Southeast Asia. It's a validation of their strategy, which is to grow in markets that still have growth ahead of them, as opposed to going head-on against Amazon (AMZN - Get Report) and eBay (EBAY - Get Report) in the West," he said.
Cyrus Mewawalla, an analyst at CM Research, said the deal adds to Alibaba's growth prospects.
"Alibaba generates over 90% of its revenues from China," Mewawalla noted. "In order to be valued as a growth stock, it really needs to demonstrate it can grow internationally. This acquisition helps achieve that."
Many of Alibaba's more recent acquisitions have been focused on technology, content and media, such as its purchases of Hong Kong newspaper the South China Morning Post and online video provider Youku Tudou last year.
"This reinforces the geographic part of the strategy," said Luria. "It extends Alibaba's ability to grow rapidly and into the future."
Luria added that "What Alibaba does very well is develop e-commerce infrastructure in countries that don't have that and that don't have an existing brick and mortar infrastructure either. That's what they did very successfully in China, and they're now trying to do that in other countries."
Morningstar analyst Marie Sun noted that Alibaba can help Lazada compete for market share in Southeast Asia and build out its logistics network, adding that the company's experience in third-party payments can also help Lazada to expand its online payments system.
"For e-commerce platforms, two things are key: market share (or large user base) and logistics," she said. "Even though Lazada is still in the red, I think as long as the company can expand its market share and has its own logistics network solution, they can make profitability in the future."
Alibaba president Michael Adams emphasized globalization as a critical strategy for Alibaba's growth in the transaction announcement. "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 e-commerce globally," he said.