Is JD.com the Best E-Commerce Opportunity for Investors?

JD.com (NASDAQ: JD  ) priced its IPO above the expected $16-$18 range at $19, and then it closed at $20.90 for a $28.5 billion valuation. By all measures, JD.com had a successful IPO; but with a business model like Amazon.com (NASDAQ: AMZN  )  and growing competition from up-and-coming peers like Vipshop Holdings (NYSE: VIPS  ) , should you be a buyer?

Kind of like Amazon!
China's e-commerce juggernaut Alibaba creates the majority of its revenue via advertising and therefore has margins north of 40%. Meanwhile, JD.com's model mirrors Amazon, whereas revenue is created from sales, and costs are excessive.

JD.com not only sells products but is also responsible for transporting 70% of the purchased goods. JD.com has 86 warehouses, 1,620 delivery stations, and 214 pick-up stations. Moreover, much of its $1.3 billion raised will be used to invest in larger infrastructure.

With all things considered, JD.com seems very much like a young Amazon...but one that is growing much faster. Looking ahead, Amazon is expected to maintain a 20% revenue growth rate  for the next two years as its e-commerce business continues to thrive but also as Amazon Web Services, or AWS, becomes a larger piece of its pie.

In comparison, JD.com, which reported $11.5 billion in revenue last year, is about 15% the size of Amazon but grew 67% in 2013 versus 2012. In the first quarter of this year, JD.com grew revenue 65%; and in looking ahead, most believe 60% growth is likely. However, JD.com shares the same problem as Amazon, that being profits, as JD.com lost $8 million last year, and investors doubt it will ever become a company with significant margins, also like Amazon.

What about valuation?
So, in determining if JD.com is a good, bad, or decent investment opportunity, we must look to its valuation. Currently, it's trading at about 2.5 times sales, which is likely the best metric of valuation given the company's lack of profits. In comparison, Amazon trades at 1.8 times sales. Albeit, growth is almost always rewarded with a higher multiple, as investors assume that a company can or will become larger. Therefore, we invest in the future, not the present.

Hence, when you compare 20% growth and 1.8 times sales for Amazon versus 65% growth and 2.5 times sales for JD.com.

Thus, if you like Amazon, you'd most likely find JD.com attractive. In fact, because JD.com is smaller in a much larger region of the globe, you might even like JD.com more; its upside is ultimately greater from a fundamental perspective.

One option that might be better
E-commerce is a popular space in China because it's growing at an annual rate of 30%, which all but guarantees growth for leaders within the space. JD.com definitely fits in this category, as does Vipshop.

Now, Vipshop trades at a bulkier 4.7 times sales ratio but is growing faster than JD.com: 125.9% in its last quarter. Vipshop is also smaller, with 12-month revenue of just about $2.1 billion. Therefore, if the investment tie-breaker between JD.com over Amazon was China and more market share to gain, then Vipshop shares that same advantage over JD.com.

However, there is one final edge that we can give to Vipshop which might make it the best value of all, and that's margins. Yes, in an industry that lacks profits, Vipshop is profitable, with an operating margin of 3.7%; it saw its operating income rise nearly 400% in its last quarter, therefore making it worth the premium.

Final thoughts
JD.com and Amazon have the quintessential e-commerce model, one used by most retailers. However, Vipshop has taken this one step further by working with specific brands, buying in bulk, and then selling quickly in bulk with a flash-selling model to have a rapid turnaround on inventory and boost margins.

Thus, Vipshop can sell products cheaper to its active customers because by buying in bulk it has lower costs; active customers increased 165.1% in the last quarter to 7.4 million. In retrospect, 7.4 million customers is small relative to China's population, and Vipshop is a company that's gaining momentum. 

Therefore, Amazon and JD.com might present investment value. But because of Vipshop's potential to keep growing and margins, it looks like the best e-commerce opportunity right now.

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