Better Buy: Etsy vs. JD.com

Etsy (ETSY 0.08%) and JD.com (JD +1.36%) are two very different types of e-commerce companies. Etsy, which mainly operates in the U.S., Canada, the U.K., and Australia, is a leading marketplace for handmade goods. JD.com is China's largest direct retailer and the country's second-largest e-commerce company after Alibaba (BABA +0.82%).

But both e-commerce stocks generated massive gains for investors over the past 12 months. Etsy's stock skyrocketed more than 300% as the pandemic forced more people to shop online. JD's stock more than doubled as shoppers flocked to its platform throughout the pandemic, even more so after China largely contained the crisis in the first half of 2020.

Image source: Getty Images.

Etsy has been a stronger growth stock than JD, but can it maintain its momentum after the pandemic ends? Let's take a fresh look at both stocks to see which is the better overall e-commerce investment.

The differences between Etsy and JD.com

Etsy and JD operate very different business models. Etsy operates a paid listing platform that doesn't take on any inventories or fulfill orders. Its sellers fulfill their own orders, and the company generates most of its revenue from listing, advertising, and transaction fees.

Etsy also acquired Reverb, an online marketplace for musical instruments, in Aug. 2019. The acquisition was well-timed, since Reverb's sales soared the following year as its brick-and-mortar rivals shut down during the pandemic. The crisis also caused a spike in handmade mask sales on Etsy.

JD is a first-party retailer that takes on inventories and fulfills its own orders via its own logistics network. It generates a smaller percentage of its revenue from its growing services business, which houses its advertising and third-party logistics business.

JD's two main rivals, Alibaba (BABA +0.82%) and Pinduoduo (PDD +1.01%), don't take on any inventories. JD operates a more capital-intensive model than both companies, but its first-party marketplace shields its customers from counterfeit goods.

Which company is growing faster?

Etsy and JD both generated accelerating revenue growth in 2020, but Etsy clearly grew at a much faster rate than its Chinese counterpart.

Data source: Company annual reports. YOY = Year-over-year.

Etsy's revenue exploded higher for three main reasons. First, more people shopped online during the pandemic, and more merchants used the platform to sell products -- such as handmade face masks -- throughout the crisis. The platform's active buyers grew 77% year-over-year to 81.9 million during the fourth quarter, and its active sellers increased 62% to 4.4 million.

Image source: Getty Images.

Second, new features -- including offsite ads, integrated videos, better personalized recommendations, and "buy now, pay later" options -- all boosted its engagement rates. Lastly, Reverb continued to grow and boost Etsy's total marketplace revenue.

JD's growth accelerated in 2020 as it penetrated China's lower-tier cities, expanded its "Prime-like" JD Plus subscription service, and attracted more shoppers with its annual 618 Shopping Festival in June. Its annual active customers rose 30.3% year-over-year to 471.9 million in the fourth quarter.

JD's sales of home appliances and consumer electronics continued to outpace the growth of the broader market, while its sales of healthcare, cosmetics, home products, and groceries continued to rise. Its higher-margin services revenue also rose 42% for the full year, thanks to the growth of its on-site advertising and third-party logistics businesses.

The profits and valuations

Etsy and JD are both firmly profitable by GAAP measures, but both companies refer to adjusted EBITDA as a clearer metric for their underlying growth. By that measure, Etsy's earnings growth accelerated last year as JD's growth decelerated.

Data source: Company annual reports. YOY = Year-over-year.

But in 2021, analysts expect JD's revenue and earnings growth to remain broadly stable as Etsy laps the pandemic and its takeover of Reverb. As a result, JD's stock looks much cheaper than Etsy's relative to its growth:

Data source: Yahoo Finance, March 12. YOY = Year-over-year.

Etsy also trades at 13 times this year's sales, while JD trades at less than one times that estimate. We should always be skeptical of analysts' estimates, but Etsy's frothy valuations will leave it more exposed to the rotation from growth stocks to value stocks if bond yields continue to rise.

The winner: JD.com

Etsy and JD are both solid long-term investments on the growing e-commerce market. But at their current valuations, JD clearly has more upside potential than Etsy -- which could struggle to justify its valuation this year as it faces tough year-over-year comparisons to 2020.