Alibaba (NYSE:BABA), China's top e-commerce and cloud company, lost nearly 10% of its value from January to late May, underperforming many industry peers. An antitrust probe in China, tighter auditing standards in the U.S., and the rotation from growth to value stocks all weighed down its stock.
Alibaba's stock might look cheap at 18 times forward earnings, but analysts still expect its earnings to dip 3% this year as it absorbs a record $2.75 billion antitrust fine. It will also need to halt its exclusive deals with big brands, which could soften its defenses against smaller e-commerce marketplaces.
And that's not all. Alibaba could be forced to divest its media assets and share its user data with the government, while its fintech affiliate, Ant Group, will be more tightly regulated as a financial holding company. Alibaba might weather all these headwinds and recover over the long term, but its stock could remain dead money for the foreseeable future.
Instead of betting on Alibaba's potential comeback, investors should consider buying shares of Chinese tech stocks that aren't in regulatory crosshairs. These three e-commerce companies fit the bill: JD.com (NASDAQ:JD), Pinduoduo (NASDAQ:PDD), and Baozun (NASDAQ:BZUN).
JD.com is China's second-largest e-commerce company after Alibaba. However, it's actually the country's largest direct retailer, since it generates most of its revenue from its first-party marketplace.
Unlike Alibaba, which generates most of its e-commerce revenue from third-party sellers on Taobao and Tmall, JD takes on its own inventories and fulfills orders with its logistics network. This business model is more capital-intensive, but it shields its buyers from fake products.
Alibaba's co-founder, Jack Ma, once said JD's lower-margin business model would end in a "tragedy," but economies of scale gradually kicked in and enabled it to generate consistent profits. JD's logistics arm also balanced out its costs by offering its services to third-party customers.
JD's revenue and adjusted earnings rose 29% and 57%, respectively, in 2020. It ended the first quarter with nearly 500 million annual active consumers, and analysts expect its revenue and earnings to grow another 26% and 13%, respectively, this year.
JD doesn't face as much regulatory heat as Alibaba, it margins are expanding, and the stock trades at just 28 times forward earnings estimates and less than 1 times estimated sales.
Pinduoduo is the third-largest e-commerce player in China in terms of annual revenue, but in terms of total shoppers, it's actually bigger than JD, with 628 million annual active buyers. Like Alibaba, Pinduoduo generates most of its revenue through listing fees and ads for third-party merchants.
Pinduoduo carved out a niche with its discount marketplace, which encouraged shoppers to team up for group discounts. That strategy, which relied heavily on users sharing links across social networks, caught on across China's lower-tier cities.
Pinduoduo subsequently expanded into China's top-tier cities and partnered with bigger brands to challenge Alibaba and JD. It also gained an early mover's advantage in online agriculture by enabling over 12 million farmers to directly ship their produce to customers.
Pinduoduo's revenue surged 97% in 2020, then soared another 239% year-over-year in the first quarter of 2021. Analysts expect its revenue to grow 92% for the full year. Those estimates are impressive for a stock that trades at about eight times this year's sales.
Pinduoduo is still unprofitable due to its aggressive discounts, subsidies for sellers, and the expansion of its logistics network. However, its adjusted operating and net losses still narrowed year-over-year last quarter, and it could gradually inch toward profitability as it increases its scale.
Baozun is sometimes called the "Shopify of China", but that comparison is misleading. Unlike Shopify, which provides self-serve e-commerce services to smaller businesses, Baozun mainly provides end-to-end e-commerce solutions to large international companies.
It can be difficult for large U.S. companies to build Chinese websites, launch marketing campaigns, and set up e-commerce marketplaces, so Baozun is a "one-stop shop" that handles all those needs. It also helps companies integrate their online marketplaces with Tmall, JD, and Pinduoduo, which makes it a well-balanced play on China's booming e-commerce sector.
Baozun's business model is capital-intensive, but it expanded its margins in recent years by pivoting from a "distribution-based" model, in which it directly fulfilled orders, to a "non-distribution" based model, which allows its clients to directly ship their products to their customers.
Baozun's revenue and adjusted earnings increased 22% and 50%, respectively, in 2020. Ninety-two percent of its GMV (gross merchandise volume) came from its non-distribution-based business. Analysts expect its revenue and adjusted earnings to rise 35% and 5%, respectively, this year.
This oft-overlooked stock trades at just 19 times forward earnings and 1.5 times this year's sales, which might make it an undervalued growth stock if investors fall in love with Chinese tech companies again.