As investors, we seek to buy good companies at attractive prices and hold them over the long run. This strategy might sound simple, but it is tough to execute in reality. Most companies can't meet the criteria of being good companies, and the few that do usually come at a high price tag.
However, for investors willing to venture beyond their comfort zone to consider foreign stocks, their chances of finding such companies increase. In fact, one of the most unloved areas that investors can look into for opportunity now is China and the companies there.
Here are two leading e-commerce giants in China that could potentially be suitable long-term investments.
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A rising star in the e-commerce sector
PDD Holdings (PDD 1.78%), parent of Pinduoduo, might not be as well-known as its larger peers, Alibaba and JD.com (JD +1.37%), but it's a significant force to be reckoned with in the Chinese e-commerce industry.
Founded less than a decade ago, PDD has used the proliferation of smartphones and its innovative business model to reach hundreds of millions of customers in China. It initially targeted rural areas to avoid direct competition with the incumbents, giving it a considerable advantage that it exploited thoroughly. Only in later years did the tech company shift its attention to cover major cities.
The business model is straightforward: giving users the lowest price and making shopping on its app fun. It uses the group-buy business model, which allows users to invite family and friends to bulk purchase the products directly from the manufacturer. This is a win-win approach since manufacturers get more orders while customers benefit from rock-bottom prices.
Pinduoduo also gamifies the shopping experience with all kinds of games and perks. For example, users can grow virtual fruit trees on the app and receive actual fruits when those virtual trees reach maturity. Lately, the tech company has also offered short video services on its app, which should help to improve user engagement.
This unconventional approach to building an e-commerce platform has been highly successful, which is evident in its numbers. For perspective, when Pinduoduo came public in 2018, the three-year-old company delivered $1.9 billion in revenue that year. In 2023, revenue was $34.9 billion and net profit was $8.5 billion.
Pinduoduo's success in China has given it the experience and resources to expand into the overseas market via a new subsidiary, Temu, in 2022. This venture is still in its early days, so assessing whether that expansion will deliver good returns in the long run is too early. However, if Temu is anywhere near as successful as the Pinduoduo platform in China, it will generate enormous value for shareholders.
NASDAQ: PDD
Key Data Points
A diversified Chinese tech giant
Unlike Pinduoduo, which leveraged the smartphone to grow, JD.com rode the internet trend early to build a massive tech empire.
Founded in 1998 as a brick-and-mortar store, JD only started selling its products online in 2004. Like Amazon, JD started selling online by purchasing goods directly from suppliers and selling them to customers at low prices. Its early success allowed it to evolve into a full-fledged e-commerce marketplace with first-party and third-party sales.
JD's value proposition to customers combines low prices, quality goods, and great services. JD's ever-growing economies of scale help keep prices low, while its integrated business model ensures quality and good services. In particular, JD's asset-heavy business model of running its warehouses and logistics networks gives it a competitive advantage over its peers. It can control the shopping experience while keeping logistics costs low, a playbook copied from Amazon.
The company's success in the e-commerce sector gave it the necessary means -- financial resources and a vast customer base -- to expand into new sectors over time. For example, JD finances consumers via its fintech division, offers healthcare products and services via JD Healthcare, and provides logistics services to external customers beyond its e-commerce operations.
With a diversified business model, JD has created a growth machine that continuously recycles its unused profits to sustain long-term growth. Such a model also helps cushion any industry's volatility in the short term, giving it a more sustainable and durable earnings performance over the long run.
In other words, JD might have already become a giant -- it generated $153 billion in revenue in 2023 -- but it still has ample room to grow its business.
What it means for investors
The general attitude toward Chinese companies is negative these days, which means that most Chinese companies trade at attractive prices. For perspective, Pinduoduo and JD trade at price-to-earnings (P/E) ratios of 17 and 11, respectively.
These low valuations reflect the underlying risks of investing in these companies -- geopolitical tension, political and regulatory risks, and so on. But for those who can stomach these risks, Pinduoduo and JD are worthy candidates to explore further.
