Alibaba (BABA 0.39%) and JD.com (JD +1.48%) are the two largest e-commerce companies in China. Alibaba is expected to control 50.8% of the market this year, according to eMarketer, as JD claims 15.9%.
However, JD is actually China's largest direct retailer in terms of revenue, since its first-party marketplace takes on its own inventories. Alibaba's Taobao and Tmall marketplaces primarily connect merchants to buyers, generating most of its revenue from listing fees and commissions.
I compared these two companies last August and believed that JD's simpler business model, firmer first-party logistics foundations, and lower dependence on third-party sellers made it a better buy than Alibaba. JD stock has stayed nearly flat since I made that call, but Alibaba has declined about 20%.
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Both stocks felt the effects of the sell-off in the tech sector, which can partly be attributed to inflation concerns and a focus on reopening plays, but Alibaba was also hit by an antitrust probe in China -- which culminated in a $2.75 billion fine and a ban on its exclusive deals with merchants. Investors also shunned Chinese stocks amid delisting threats in the U.S.
These challenges paint a grim picture for Alibaba and JD, but is one of these e-commerce giants more likely to recover than the other?
An apples-to-oranges comparison
Alibaba and JD are often compared to each other, but the two companies are very different.
In fiscal 2021, which ended in March, Alibaba generated 87% of its revenue and all of its profits from its core commerce unit, which includes its Taobao and Tmall marketplaces, brick-and-mortar stores, cross-border and international marketplaces, and its Cainiao logistics subsidiary.
This business makes most of its money from third-party sellers, which pay higher-margin listing fees, but Alibaba been gradually increasing its dependence on its lower-margin brick-and-mortar, cross-border, and international channels to boost revenue. Alibaba's Chinese retail businesses serve 891 million annual active consumers within China, while its global ecosystem serves more than a billion consumers.
The rest of the top line came from three unprofitable segments: Alibaba Cloud, China's largest cloud infrastructure platform; the digital media and entertainment division, which houses its streaming video platform Youku Tudou and mobile gaming unit Lingxi; and the innovation initiatives segment, which develops other products and services.
Operating losses from those segments were equivalent to 4.9% of its total revenue for the year, although its cloud segment turned profitable on an adjusted EBITA basis over the past two quarters.
JD generated 94% of its revenue and all of its profits from its JD Retail segment in fiscal 2020, which aligns with the calendar year. This business makes most of its money from its first-party marketplace, which fulfills orders with its own warehouses and logistics network, but it also operates a smaller marketplace for third-party merchants and brick-and-mortar stores. JD ended the first quarter of 2021 with 500 million annual active customers.
The rest of JD's revenue mainly came from its unprofitable new businesses segment, including JD Cloud and its third-party logistics services for external customers. Operating losses from that segment were only equivalent to 0.3% of its total revenue for the year.
Which company is growing faster?
Alibaba and JD both generated robust growth throughout the pandemic, which was contained earlier in China than the rest of the world, and they benefited from aggressive expansions into smaller cities.
Alibaba's revenue rose 41% to 717.3 billion yuan ($109.5 billion) in fiscal 2021. Excluding its consolidation of the superstore owner Sun Art, its revenue would have risen 32%. Operating income dipped 2%, mainly due to the antitrust fine in China, but its adjusted net income -- which excludes that charge and stock-based compensation -- still rose 30%.
Analysts expect Alibaba's revenue to rise 36% this year, while its adjusted earnings dip 2% as it continues to expand its lower-margin retail channels and unprofitable non-core businesses. The elimination of its exclusive deals with merchants and tougher oversight of its future investments and acquisitions could also throttle its earnings growth.
JD's revenue rose 29% to 745.8 billion yuan ($114.3 billion) in fiscal 2020, while its adjusted earnings increased 57%. That bottom-line growth was driven by the scale of its first-party logistics platform -- which could expand even faster after its IPO in May -- as well as tighter cost controls at JD Retail and its new businesses. Unlike Alibaba, JD shouldn't face much pressure from antitrust regulators this year.
JD also posted impressive growth again in the first quarter of 2021, and analysts expect its revenue to grow 28% this year. However, they still see earnings declining 4% against a tough comparison to 2020.
The valuations and verdict
Alibaba trades at 18 times forward earnings, while JD has a higher forward P/E ratio of 33. However, Alibaba stock could trade at a discount as long as Chinese regulators cap its long-term growth potential.
Meanwhile, JD doesn't face any significant regulatory challenges, and it's supporting fewer unprofitable businesses with its core retail business. Therefore, JD might seem pricier than Alibaba, but I believe it will continue to outperform the e-commerce and cloud leader for the foreseeable future.
