JD.com (JD 6.12%) and PDD Holdings (PDD 2.80%) -- better known as Pinduoduo -- are China's second- and third-largest e-commerce companies, respectively, after Alibaba (NYSE: BABA).
JD, which was founded in 1998, flourished in Alibaba's shadow by building a massive first-party logistics network and taking on its own inventories instead of relying on third-party sellers. Pinduoduo, founded in 2015, initially carved out a niche with its discount marketplace for China's lower-tier cities before launching the country's largest online agricultural marketplace for farm-to-table produce.
Yet, the market has clearly favored Pinduoduo over JD. During the past 12 months, Pinduoduo's stock soared more than 80% even as JD's stock slumped nearly 50%. Let's see why the newcomer outperformed its older competitor -- and if it's still the better buy.
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Pinduoduo is still firing on all cylinders
When Pinduoduo went public in 2018, the critics claimed it was just another hypergrowth Chinese e-commerce company that would eventually burn out before ever turning a profit. But in 2021, its operating margin turned positive on the basis of generally accepted accounting principles (GAAP) and propelled it to its first full-year profit. It accomplished that by phasing out its lower-margin first-party marketplace, selling higher-margin products, and reining in its spending.
In 2022, Pinduoduo's revenue rose 39% (in yuan terms), its operating margin more than tripled from 7.3% to 23.3%, and its net income more than quadrupled. For 2023, analysts expect its revenue to surge 83%, its operating margin to expand to 24.2%, and its net income to rise 57%.
Those explosive growth rates make it China's fastest-growing e-commerce leader by a wide margin. Three tailwinds are driving that expansion: the popularity of its discount marketplace, the rapid expansion of its farm-to-table marketplace, and the antitrust crackdown on Alibaba. That last one barred its largest competitor from locking in merchants with exclusive deals, using aggressive algorithmic promotions, and making unapproved investments.
Pinduoduo expects to continue growing as the Chinese economy gradually stabilizes and consumer spending accelerates again. The rapid growth of its cross-border marketplace Temu, which enables its Chinese sellers to directly sell their products to overseas buyers, could also reduce its dependence on the Chinese market while enabling it to challenge Alibaba's AliExpress, Shein, Wish, and Amazon in the cross-border market.
JD is running out of room to grow
When JD went public in 2014, the critics claimed it would struggle to stay profitable as it expanded its capital-intensive first-party marketplace and logistics network. But economies of scale eventually kicked in and stabilized its profits.
JD's revenue rose 10% (in yuan terms) in 2022, its operating margin rose from 0.4% to 1.9%, and its net income stayed positive for the full year. For 2023, analysts expect its revenue to rise just 3% -- but its net income could more than double.
However, sales growth has slowed down over the past year as it has grappled with China's uneven post-pandemic recovery and stiff competition from Alibaba and Pinduoduo. JD also benefited from the antitrust crackdown on Alibaba, but it has struggled to keep pace with Pinduoduo in the discount shopping and online grocery markets.
The company scaled back its discount marketplace Jingxi over the past year to cut costs, which strongly indicates that it's ceding the lower-end market to Pinduoduo. But as JD retreats from the discount market, Pinduoduo has been creeping into JD's backyard by expanding its own lineup of pricier products to attract higher-end shoppers.
JD has also been downsizing its overseas marketplaces to further reduce its expenses -- which implies it will remain tightly tethered to the Chinese market and struggle to keep up with Pinduoduo's Temu and Alibaba's cross-border and overseas marketplaces.
Like Alibaba, JD has been restructuring its smaller business units for spinoffs and IPOs. It believes those spinoffs will enable its subsidiaries to flourish on their own, but they arguably reinforce the bearish notion that it's running out of room to grow.
The better buy: Pinduoduo
Pinduoduo has a forward multiple of 24, while JD looks a lot cheaper at 11 times forward earnings. However, Pinduoduo still doesn't seem expensive relative to its growth potential after its year-long rally -- while JD might deserve its discount valuation until its sales growth accelerates again.
Therefore, I believe Pinduoduo's superior growth, higher margins, and clearer expansion plans will help it outperform JD and many of its Chinese e-commerce peers for the foreseeable future.
