Following months of anticipation, Alibaba filed for its initial public offering in May and plans to price a deal in early August. With management expected to sell a 12% stake in the business and an equity valuation that could exceed $200 billion, this could end up being one of the largest IPOs in history.
So why should investors care about Alibaba's IPO? We identify three reasons. The first is the company has a powerful network effect in a relatively early stage business. Network effect is among the most rare, but also the most powerful sources of economic moat that we identify at Morningstar. But typically a network effect doesn't emerge until the company is in a much more mature state of business. Alibaba is unique in that the Chinese e-commerce market is in a relatively early stage of its life cycle and has a long runway of growth ahead of it. We think that this network effect--which essentially means that as more buyers come to market, it attracts more sellers and vice versa--will continue to proliferate as the number of tailwinds support the growth of this company over the longer term.
A second key consideration is the underdeveloped retail market in China. Compared with the likes of the United States, the United Kingdom, and Germany, China's retail market is substantially underdeveloped. This is important because e-commerce is coming at a time when the retail market is highly fragmented and could lead to market share gains for Alibaba. In most developed nations, there was a period of enormous consolidation in the retail industry's evolution. We think that because e-commerce is prevalent and such a big part of consumers' lives today, that China's market will bypass a lot of this consolidation and move right into the e-commerce phase, which should yield quite a bit of market share gains for China.
The third consideration that we think investors should be aware of is favorable consumer spending tailwinds that should benefit the company not only in the form of new users to Alibaba's platforms but also increased engagement among its existing users. There are four factors at play here. The first is wage rate increases which should lead to increased disposable income among China's middle-class consumers. The second is demographic trends and urbanization trends. What we find in China is that there is a much younger population that should ultimately have a life time of transactions ahead of them. The third is government policy changes that ultimately should spur on increased consumer spending. And the fourth effectively is, that we believe China's Internet-adoption rate is underpenetrated compared to other nations, and as more and more Chinese consumers go online, we think that this will have a positive impact for Alibaba.
