China's gross domestic product rose 4.5% in the first quarter of 2023, beating the consensus forecast for 3.4% growth, as the country bounced back from the pandemic-related lockdowns that finally ended in late 2022. That better-than-expected growth suggests it might be time to pick up a few beaten-down Chinese stocks before the bulls rush back.
Two potential plays on that recovery are Alibaba (BABA 0.59%) and JD.com (JD 6.12%), the two largest e-commerce companies in China. Alibaba and JD still trade about 70% and 60% below their all-time highs, respectively, but they both look cheap -- Alibaba trades at just 11 times forward earnings, while JD has a forward price-to-earnings ratio of 14. Should you buy either of these out-of-favor Chinese stocks today?
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The key differences between Alibaba and JD
Alibaba and JD operate different business models. Alibaba's two largest Chinese online marketplaces, Tmall and Taobao, are third-party platforms for consumer-to-consumer and business-to-consumer transactions, respectively. They both generate most of their revenue from transaction and advertising fees for promoted listings.
JD generates most of its sales from its first-party marketplace, which takes on its own inventories, but it also operates a smaller third-party marketplace. That capital-intensive approach causes JD to operate at lower margins than Alibaba, but enables it to provide tighter quality control measures. Both Alibaba and JD also operate brick-and-mortar grocery stores.
Alibaba's e-commerce ecosystem is more fragmented than JD's. It owns the business-to-business platform Alibaba.com, the cross-border marketplaces AliExpress and Kaola, the Southeast Asian marketplace Lazada, and the Turkish marketplace Trendyol. JD generates nearly all of its retail revenue from its core marketplace, and it hasn't significantly expanded overseas.
Alibaba generated 87% of its revenue from its commerce and logistics divisions in the first nine months of fiscal 2023 (which ended this March). Another 9% came from Alibaba Cloud, the largest cloud infrastructure platform in China, and the remaining 4% came from its digital media business, which owns the streaming video platform Youku Tudou.
JD generated 89% of its revenue from its core retail division in 2022, while the rest mainly came from its logistics business -- which serves both JD's own retail business as well as third-party customers. JD also owns a cloud platform, a digital healthcare business, and a fintech platform -- but those divisions are still relatively small.
Last but not least, Alibaba's growth has been hampered by strict antitrust restrictions, which prevent it from locking in merchants with exclusive partnerships, using aggressive loss-leading strategies to gain customers, and expanding its ecosystem with unapproved acquisitions. As the underdog, JD doesn't face as many government restrictions.
Which company is growing faster?
Alibaba's revenue only rose 2% year over year in the first nine months of fiscal 2023 as its adjusted earnings per ADR dipped 2%. Its Chinese commerce revenue grew 1% as its cloud revenue rose 5%. Both businesses faced tough challenges.
Alibaba's e-commerce sales stalled out as China's lockdown measures curbed consumer spending and throttled the country's economic growth. The antitrust regulations also eroded its defenses against JD and Pinduoduo.
Those same headwinds caused large companies to rein in their spending on Alibaba's cloud services. ByteDance's decision to move TikTok's overseas data from Alibaba Cloud to Oracle Cloud Infrastructure exacerbated that slowdown. But for the full year, analysts expect Alibaba's revenue and adjusted earnings to rise 7% and 6%, respectively, as its growth accelerates again in the fourth quarter. For fiscal 2024, they expect its revenue and earnings to grow 10% and 13%, respectively.
In 2022, JD's revenue rose 10% as its adjusted earnings per ADR rose 65%. Most of that profit growth was driven by tighter spending at JD Retail and JD Logistics -- which was also expanded as a higher-margin service for external customers.
JD faced many of the same macro headwinds as Alibaba throughout the year, but it also seemed to benefit from the antitrust restrictions against Alibaba. Furthermore, JD hasn't been trying to juggle as many non-core businesses as Alibaba. Instead, JD spun out some of its non-core business divisions (JD Logistics and JD Health) in fresh IPOs to attract more external investors and focus on the expansion of its JD Retail division. In a similar move, Alibaba recently restructured its business to focus on the growth of its commerce and cloud units while potentially spinning out some of its non-core divisions.
Analysts expect JD's revenue and adjusted earnings to grow 6% and 9%, respectively, in 2023. JD will likely benefit from China's post-pandemic economic recovery, but it also faces intense competition from Pinduoduo -- which is still growing at a much faster rate than both JD and Alibaba -- in the lower-end retail and grocery markets.
The better buy: Alibaba
Alibaba still faces regulatory headwinds, but its lower valuation and more diverse basket of businesses make it a better post-pandemic play than JD. Alibaba probably won't rally anytime soon, especially as delisting threats loom over all U.S.-listed Chinese stocks, but it could still be a solid long-term play on the secular expansion of China's e-commerce and cloud markets.
