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Better Buy: Alibaba vs. JD.com

By Leo Sun – Aug 25, 2020 at 11:00AM

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Which Chinese e-commerce giant has more room to run?

Alibaba (BABA -3.65%) and JD.com (JD -3.39%), the two largest e-commerce companies in China, both recently posted earnings reports that dazzled investors.

Alibaba's revenue rose 34% annually in its latest quarter, and its adjusted earnings grew 18%. JD's revenue also rose 34% as its adjusted earnings soared 53%. Both companies shattered analysts' expectations on the top and bottom lines, and both stocks now trade near their all-time highs.

I compared these two stocks last December, and I declared that JD's lower valuation and improving fundamentals made it a better buy than Alibaba. JD's stock rallied over 125% since I wrote that article, while Alibaba's stock advanced just 30%. Let's examine the reasons JD outperformed Alibaba, and whether that trend will continue throughout the rest of 2020.

Parcels in a warehouse.

Image source: Getty Images.

The key differences between Alibaba and JD

Alibaba and JD are fierce rivals in China's e-commerce market, but the two companies operate different business models.

Alibaba's campus in Hangzhou.

Image source: Alibaba.

Alibaba generates most of its revenue from its core commerce business -- which includes its Chinese marketplaces, cross-border and overseas marketplaces, and brick-and-mortar stores. However, Alibaba's biggest marketplaces -- including Taobao and Tmall in China -- don't take on inventories or fulfill their own orders.

Instead, they're paid advertising platforms that charge higher fees for higher-ranked listings. Its orders are mainly fulfilled by its logistics affiliate Cainiao, which shoulder the fulfillment costs for Alibaba. Alibaba's core Chinese marketplaces hosted 742 million annual active consumers last quarter.

Alibaba's core commerce business is its only profitable unit, and its profits subsidize the growth of its cloud, digital media and entertainment, and innovation initiatives businesses -- which together generated only 13% of its revenues last quarter.

JD operates fewer distinct marketplaces than Alibaba, and it generates most of its revenue from its namesake platform in China. Over 417 million active consumers shopped on JD over the past year.

Unlike Alibaba, JD takes on inventories and fulfills its own orders via a first-party logistics network. JD's model generates much lower operating margins than Alibaba but grants it much tighter control over the quality of its products and the speed of its deliveries.

JD invested in the expansion of its logistics network for years, and it's launching next-gen delivery solutions -- including drones and autonomous delivery vehicles -- across that ecosystem. JD offers its logistics services to other companies, and those higher-margin revenues are gradually offsetting the costs of its first-party deliveries.

JD's ecosystem also includes a cloud business and a digital healthcare (telehealth and online pharmacy) segment, but these newer businesses don't generate meaningful revenues yet.

How fast are Alibaba and JD growing?

Alibaba and JD both posted accelerating revenue growth in their latest quarters. But Alibaba's growth only marked a single quarter of accelerating growth, while JD's revenue grew at its fastest rate in 10 quarters.

JD CEO Richard Liu makes a delivery.

Image source: JD.com

JD's robust growth was sparked by its 618 Grand Promotion, an annual sale between June 1 and June 18. JD's growth in active customers accelerated, with over 80% of its new shoppers coming from lower-tier cities, and its operating margin expanded year over year as the increased scale of JD Retail and JD Logistics reduced its total operating expenses.

JD didn't provide any guidance, but analysts expect its revenue and adjusted earnings to rise 25% and 46%, respectively, in USD terms this year. JD's stock arguably looks cheap relative to that growth, at just over 50 times forward earnings.

As for Alibaba, the revenue growth of its core commerce and cloud businesses accelerated from the previous quarter. A shift of its tiny gaming business from the innovation initiatives unit to the digital media unit also boosted the latter's revenues. Like JD, Alibaba also continued to gain shoppers from lower-tier cities.

However, Alibaba's operating margin contracted sharply during the quarter, as it continued to expand its ecosystem and its unprofitable cloud, digital media, and innovation units weighed down its margins.

Moreover, Alibaba's core commerce business continues to rely on lower-margin divisions -- including its brick-and-mortar stores, cross-border marketplaces, and its stake in Cainiao -- to offset the slower growth of its higher-margin Chinese e-commerce marketplaces.

Alibaba still expects its revenue to rise at least 28% this year, but it didn't provide any earnings guidance. Wall Street expects its revenue and earnings to rise 33% and 19%, respectively, in USD terms this year -- and its stock trades at just under 30 times forward earnings.

The clear winner: JD.com

I like both Alibaba and JD as long-term plays on China, but JD clearly enjoys several advantages against its bigger e-commerce rival.

JD's business is simpler, its years of investments in infrastructure and logistics are bearing fruit and boosting its margins, and it will probably generate stronger earnings growth than Alibaba for the foreseeable future. Alibaba needs to figure out how to grow its core commerce business without sacrificing its margins, and consider divesting non-core assets like mobile apps, games, and its streaming media platforms to streamline its business.

Until Alibaba makes those changes, JD will remain the stronger overall play on China's booming e-commerce market.

 

Leo Sun owns shares of JD.com. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. and JD.com. The Motley Fool has a disclosure policy.

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Stocks Mentioned

JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$49.91 (-3.39%) $-1.75
Alibaba Group Holding Ltd. Stock Quote
Alibaba Group Holding Ltd.
BABA
$81.24 (-3.65%) $-3.08

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