In the past three months, Alibabain (NYSE: BABA) stocks fell more than 20% as the Chinese tech giant faced unprecedented challenges.
In November, the long-awaited Ant Group IPO was abruptly suspended after Jack Ma, the founder of fintech, criticized China’s banking system. Ma, who was a co-founder of Alibaba and previously served as CEO and CEO, subsequently disappeared from public view. The shares of Alibaba, which holds 33% of Ant’s capital, fell after these unexpected events.
In December, Chinese regulators delivered two more coups. First, they fined Alibaba for its unapproved acquisition of the InTime Retail department store chain, which could undermine its future brick and mortar plans. Second, they launched an antitrust investigation into Alibaba’s e-commerce business over its pricing strategies and exclusive deals with merchants.
Image source: Alibaba.
To make matters worse, the United States passed a new law that would force American stock exchanges to remove any foreign company that did not comply with the United States’ audit rules for three consecutive years. The Trump administration is also considering banning investments in Alibaba and Tencent about his alleged ties to the Chinese military.
Value-seeking investors may be tempted to buy Alibaba now, as it looks historically cheap, with 18 times the future profit. However, I believe it’s smarter to buy your biggest e-commerce rival, JD.com (NASDAQ: JD), for three simple reasons.
1. No antitrust drama
JD controlled 17.1% of China’s e-commerce market in 2020, according to eMarketer, while Alibaba held 56% of the market. The company expects JD’s share to grow to 18.1% this year, while Alibaba’s share rises to 56.6%.
Alibaba, JD and Pinduoduo (NASDAQ: PDD) – which ranks third – everyone should continue to grow as smaller players continue to shrink. However, JD and Pinduoduo do not face any antitrust pressure like Alibaba.
Instead, JD and Pinduoduo launched the antitrust investigation against Alibaba. JD says that Alibaba’s exclusive deals with clothing brands stifled its clothing business three years ago, while sellers claimed that Alibaba would remove its listings if it listed the same products on Pinduoduo.
JD has a fintech subsidiary, JD Digits, but mainly offers consumer loans and supply chain financing services. It doesn’t have a dominant consumer-oriented platform, like Ant’s Alipay or Tencent’s WeChat Pay, so it probably won’t be the target of antitrust regulators. JD’s cloud platform is also much smaller than Alibaba’s market-leading cloud platform, which currently faces scrutiny in the United States over its alleged ties to the Chinese military.
2. A high-quality business model
Alibaba’s two largest markets, Taobao and Tmall, are mainly paid listing platforms for brands and merchants. They take no stock, and only help to fulfill orders through their logistics subsidiary Cainiao.
JD is a primary retailer that takes inventory and fulfills its own orders. Its logistics network covers almost the whole of China, with call centers in seven cities, frontal distribution centers in 31 cities and more than 800 warehouses across the country. This network is becoming increasingly automated with depot robots, driverless delivery vehicles and drones.
JD’s business model is much more capital intensive than Alibaba’s, but this protects its customers from counterfeit products. That’s why JD is not on the US Trade Representative’s “notorious markets” list for counterfeit markets – while Taobao and Pinduoduo are.
3. Robust growth rates at a reasonable price
JD generated robust double-digit revenue growth last year, as its growth in annual active customers accelerated.
|
Growth (YOY) |
3rd quarter of 2019 |
Fourth quarter of 2019 |
Q1 2020 |
2nd quarter of 2020 |
Q3 2020 |
|---|---|---|---|---|---|
|
recipe |
28.7% |
26.6% |
20.7% |
33.8% |
29.2% |
|
Annual active customers |
9.6% |
18.6% |
24.8% |
29.9% |
32.1% |
YOY = year after year. Source: JD.com.
The company attributed this growth to robust sales of general merchandise, consumer electronics and home appliances, as well as its continued expansion to lower-tier cities, which accounted for about 80% of its new buyers in the last quarter.
JD’s margins are also expanding as economies of scale reduce its infrastructure expenses and the cost of acquiring new customers. In addition, the expansion of JD Logistics as an outsourced service to other companies is also increasing margins in the capital intensive segment.
As a result, analysts expect JD’s revenue and profit to increase 39% and 60%, respectively, this year. Next year, they expect their revenue and profit to grow another 23% and 41%, respectively – but those estimates can be very conservative if Chinese regulators continue their crackdown on Alibaba.
JD’s shares have more than doubled in price in the past 12 months, but still look surprisingly cheap, 38 times future profits and less than once the following year’s sales. Alibaba remains cheaper than JD in terms of its earnings, but it is more expensive in terms of its revenue, more than four times next year’s sales.
The final result
JD is still vulnerable to new auditing requirements in the United States, but the company still has three years to meet those requirements. In the meantime, JD will not face any of the other regulatory headwinds that are affecting Alibaba, and is still generating robust growth at a reasonable price.