Investors in JD.Com (JD -0.25%) and Pinduoduo  (PDD -2.99%) -- both leading Chinese e-commerce companies -- have reaped solid returns as their share prices appreciated by 52% and 114%,  respectively, in the last 12 months. But which company is the better investment going forward? Here are two ways to look at that question.

A miniature shopping cart overflowing with cardboard boxes sits atop a computer keyboard.

Source: Getty Image

Business model

The younger of the two companies, Pinduoduo operates a mobile-first, social e-commerce platform that connects online sellers to customers. Its bulk-purchase model allows customers to form groups to buy their products at discounted prices. This, too, creates good value for sellers, since they receive bigger purchase orders. The company also incorporates online games to its platform to bring fun and joy to the shopping experience -- for example, customers can grow virtual farms to receive real fruits.

Like Pinduoduo, JD also operates a marketplace that connects sellers to customers. Unlike its rival, however, JD also operates a massive direct sales business that sells products straight to customers, like Moreover, it has one of the largest, if not the largest, fulfillment infrastructure systems (with last-mile delivery) in China, covering almost all of the country's counties and districts. By integrating e-commerce and logistics, aims to offer the best online shopping experience for its customers, while keeping its operating costs low.

Another major difference between the two is their business activities. Since day one, Pinduoduo has stayed within its e-commerce roots of operating a platform. JD, however, has ventured into adjacent industries like logistics, finance, and healthcare. Geographically, Pinduoduo operates only in China (at least for now), while JD has operations in countries like the United States, Indonesia, Thailand, and more.

Future prospects

Founded in 2015 , Pinduoduo rapidly grew revenue to US$4.3 billion  in the latest fiscal year, thanks to its meteoric rise in gross merchandise value (GMV), which reached US$144.6 billion for the 12 months ended Dec. 30, 2019.  In the latest quarter, revenue continued to grow at a breathtaking rate of 91% year over year, thanks to an increase in the number of active buyers and their average spending. Such growth , however, cost the company: its marketing costs jumped 54% to $1.3 billion,, resulting in an operating loss of $307 million for the quarter.

Going forward, Pinduoduo could sustain its growth trajectory by growing its GMV (by increasing the number of active buyers and the spending per active buyer) and increasing its platform's monetization rate. Considering how competitive China's e-commerce industry is, that outcome's far from certain. Still, Pinduoduo is well-positioned to deliver thanks to its strong cash position -- it has $5.9 billion in unrestricted cash and investments  that could be invested in the business -- and a strong leadership team led by founder Huang Zheng, a serial entrepreneur with significant experience in running technology companies.

Similar to Pinduoduo, has been popular among growth investors because of its high growth in the recent past (revenue grew at an annualized rate of 33.5% for the last four years ). In the latest quarter, net revenue came in 27% higher year over year , thanks to higher product and service revenue. Unlike its rival, JD's retail business is already profitable -- operating margin even expanded from 1.1% in the corresponding quarter last year to 1.4%. 

In the future, JD could grow its business across multiple fronts. To start with, it could accelerate its retail business's growth in smaller cities, after posting some good results lately in these markets. Beyond its traditional retail business, it could expand its logistics, finance, and healthcare ventures, which as a group grew at rapid 63%  in 2019. Meanwhile, it could also leverage its growing scale to improve its operating margin, which would improve its profitability over time. 

In short, both companies have delivered strong historical performance, and both have solid prospects going forward. or Pinduoduo?

Though both companies are major e-commerce players in China, JD and Pinduoduo are different in many ways.

Investors looking to invest in a young, fast-growing, and e-commerce only business should prioritize Pinduoduo over JD -- though they need to bear in mind that Pinduoduo is still unprofitable.

JD, on the other hand, might appeal to investors looking for a combination of diversification, profitability, and growth.