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Powerful Network Effect Makes Alibaba a Rare Find

We assign the e-commerce firm a wide moat rating ahead of its IPO.

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Following months of anticipation, Alibaba Group is now expected to price its initial public offering in early August. The company plans to list on the New York Stock Exchange under the ticker symbol BABA. Details about the offering's size have been limited, but multiple media reports suggest that the company is looking to sell a 12% stake with the offering. Our preliminary equity value for Alibaba is CNY 1,362 billion ($220 billion), which would equate to an offering of $26 billion and make it the largest IPO in U.S. history.

Alibaba offers several attractive features for investors, including an already powerful network effect in the relatively nascent Chinese e-commerce industry, which should drive meaningful market share gains in the years to come; a compelling blend of macroeconomic, socioeconomic, regulatory, and industry catalysts that should translate into an exceptionally long runway for growth; and strong free cash flow prospects based on an exceptionally leverageable business model. We believe Alibaba's IPO should be on the radar screens for investors seeking exposure to China's emerging middle-class consumers as well as its e-commerce, technology, and logistics industries.

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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.