JD.com's (JD -0.79%) stock dipped 4.5% on Nov. 18 after the Chinese e-commerce giant posted a mixed third-quarter earnings report. Its revenue rose 11% year over year to 243.5 billion yuan ($34.2 billion), which missed analysts' expectations by $270 million. However, its adjusted net income doubled year over year to 10 billion yuan ($1.4 billion), or $0.88 per ADS, which easily cleared the consensus forecast by $0.25.
JD's numbers look a lot better than Alibaba's, but is it the right time to invest in China's second-largest e-commerce player?
A simpler play on China's e-commerce market
JD differs from Alibaba in three ways. First, it generates most of its revenue through first-party sales instead of third-party sales like Alibaba's Taobao and Tmall. JD's approach generates lower-margin revenues because it takes on its own inventories and fulfills those orders on its own, but that approach also enables it to exercise tighter quality controls. JD has gradually opened up its platform to third-party sellers, but that ecosystem is still dwarfed by its own first-party marketplace.
Second, JD is an underdog in the e-commerce market, and it hasn't been as heavily scrutinized by antitrust regulators as Alibaba. It has been hit by a few minor fines for its promotional tactics, but it hasn't been struck with anything close to Alibaba's antitrust fine of $2.8 billion. Moreover, the new restrictions imposed on Alibaba -- which bar its exclusive deals with merchants, restrict its promotional strategies, and limit its investments -- could actually benefit JD and its peers.
Lastly, JD isn't as heavily invested in non-commerce markets as Alibaba. It operates smaller cloud, fintech, and healthcare subsidiaries, but those businesses don't generate nearly as much revenue as Alibaba's cloud platform, its fintech affiliate Ant Group, or its streaming media platform Youku Tudou. In fact, JD's only noteworthy subsidiary is JD Logistics, its first-party logistics network that also provides its services to external customers.
All these factors make JD a simpler play on China's e-commerce market than Alibaba, which currently faces a grueling slowdown as its core Chinese e-commerce and cloud businesses stall out.
JD is still growing in a tough market
JD and Alibaba both struggled with the slowing growth of the Chinese economy and intermittent COVID-19 lockdowns over the past year. But despite all those challenges, JD continues to gain more customers. JD's number of annual active customers grew 6.5% year over year to 588.3 million in the third quarter, which cooled off from its 9.2% growth in the second quarter. However, JD Retail's revenue still rose 7% year over year and accelerated from its 3.9% growth in the second quarter.
Its accelerating sales of big ticket items like electronics and home appliances, which offset its slower sales of discretionary products like cosmetics and beverages, helped drive that growth. By comparison, Alibaba's China commerce sales fell 1% year over year in its latest quarter, which marked a deceleration from its 1% growth in the previous quarter.
JD Retail accounted for 87% of JD's sales in the third quarter. The rest mainly came from JD Logistics, which experienced a major growth spurt after it started offering its services to external customers. JD Logistics' revenue surged 39% year over year in the third quarter, accelerating from its 20% growth in the second quarter, as it continued to profit from the growing need for more efficient delivery services across China.
Improving margins and profitability
Back in 2015, Alibaba's founder and former CEO Jack Ma mocked JD's capital-intensive logistics model and declared it would end in a "tragedy." JD's margins remained slim (and often negative) as it expanded that network to more than 1,500 warehouses over the past several years, but economies of scale gradually kicked in and stabilized its operating profits.
That's why it wasn't surprising to see JD Retail's adjusted operating margin expand 120 basis points year over year and 180 basis points sequentially to 5.2% in the third quarter. JD Logistics' operating margin also improved 350 basis points year over year and 60 basis points sequentially to 0.7%, countering the bearish notion that it would remain unprofitable.
As a result, JD's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin expanded by an impressive 200 basis points sequentially and year over year to 4.7% in the third quarter.
But is it the right time to buy JD?
Analysts expect JD's revenue and adjusted EBITDA to rise 11% and 67%, respectively, for the full year. In 2023, they expect its revenue and adjusted EBITDA to increase 17% and 23%, respectively. Based on those estimates (which we should take with a grain of salt), JD's stock looks cheap at 16 times next year's adjusted EBITDA. It isn't as cheap as Alibaba, which trades at just 9 times next year's adjusted EBITDA, but it's also growing faster and faces fewer near-term challenges.
JD still faces macro headwinds in China and delisting threats in the U.S., but it's arguably a better buy than Alibaba. If you believe JD will dodge a delisting in the U.S. and China will finally end its disruptive zero-COVID policies, then it's certainly the right time to buy a few shares of this e-commerce giant.