The past three months have Alibabasay (NYSE: BABA) the stock tumbled more than 20% as the Chinese technology giant faced unprecedented challenges.
In November, Ant Group’s long-awaited IPO was suddenly suspended after Jack Ma, the founder of the fintech company, criticized China’s banking system. Ma, who co-founded Alibaba and previously served as CEO and chief executive officer, has since disappeared from the public eye. The shares of Alibaba, which owns a 33% stake in Ant, fell after the unexpected developments.
In December, Chinese regulators delivered two more blows. First, they fined Alibaba for the unapproved takeover of the retail chain InTime Retail, which could derail its future brick-and-mortar plans. Second, they launched an antitrust investigation into Alibaba’s e-commerce business over pricing strategies and exclusive deals with merchants.
Image source: Alibaba.
To make matters worse, the US passed a new law that would force US stock exchanges to delist foreign companies that do not comply with US auditing rules for three consecutive years. The Trump administration also allegedly accuses an investment ban on Alibaba and Tencent about their alleged ties to the Chinese military.
Value-seeking investors may now be tempted to buy Alibaba, as it has historically looked cheap with 18 times upfront earnings. However, I believe it is smarter to buy its biggest competitor for e-commerce, JD.com (NASDAQ: JD), for three simple reasons.
1. No antitrust drama
According to eMarketer, JD controlled 17.1% of China’s e-commerce market in 2020, while Alibaba had a 56% share. The company expects JD’s share to grow to 18.1% this year, as Alibaba’s share rises to 56.6%.
Alibaba, JD, en Pinduoduo (NASDAQ: PDD) – which takes third place – is expected to all continue to grow as the smaller players continue to shrink. However, JD and Pinduoduo do not face any antitrust heat like Alibaba.
Instead, JD and Pinduoduo sparked the antitrust investigation against Alibaba. JD claims Alibaba’s exclusive deals with clothing brands suffocated its clothing business three years ago, while sellers claim Alibaba removed their offerings when they listed the same products on Pinduoduo.
JD owns a fintech subsidiary, JD Digits, but mainly provides consumer loans and financing services to the supply chain. It does not possess a dominant consumer-facing platform, such as Ant’s Alipay or Tencent’s WeChat Pay, and it is unlikely to be targeted by antitrust regulators. JD’s cloud platform is also much smaller than Alibaba’s leading cloud platform, which is currently under investigation in the US due to its alleged ties to the Chinese military.
2. A higher quality business model
Alibaba’s two largest markets, Taobao and Tmall, are primarily paid listing platforms for brands and retailers. They do not take up stock and only help to execute their orders through the Cainiao logistics subsidiary.
JD is a first party retailer that takes stock and executes its own orders. Its logistics network covers almost all of China with fulfillment centers in seven cities, leading distribution centers in 31 cities and more than 800 warehouses nationwide. The network is becoming increasingly automated with warehouse robots, driverless delivery vehicles and drones.
JD’s business model is much more capital intensive than that of Alibaba, but it is isolated on its buyers of counterfeit products. That’s why JD is not on the US Trade Representative’s “infamous markets” list for fake marketplaces – while Taobao and Pinduoduo are.
Robust growth rates at a reasonable price
JD has generated strong double-digit growth in revenue over the past year as growth in annual active customers accelerates.
|
Growth (YYYY) |
Q3 2019 |
Q4 2019 |
Q1 2020 |
Q2 2020 |
Q3 2020 |
|---|---|---|---|---|---|
|
Income |
28.7% |
26.6% |
20.7% |
33.8% |
29.2% |
|
Annual active customers |
9.6% |
18.6% |
24.8% |
29.9% |
32.1% |
JOJ = Year over year. Source: JD.com.
The company attributed the growth to strong sales of general merchandise, consumer electronics and home appliances, as well as the continued expansion to lower-level cities, which accounted for about 80% of its new buyers last quarter.
JD’s margins are also increasing as economies of scale reduce infrastructure costs and the cost of acquiring new purchases. Furthermore, the expansion of JD Logistics as a third-party service for other companies also increases the margins of the capital-intensive segment.
As a result, analysts expect JD’s revenue and earnings to rise by 39% and 60% respectively this year. Next year, they expect its revenue and earnings to grow by another 23% and 41% respectively – but these estimates may actually be too conservative if Chinese regulators continue their onslaught on Alibaba.
JD’s share price has more than doubled in the last twelve months, but it still looks surprisingly cheap at 38 times the down payment and less than once next year’s sales. Alibaba remains cheaper than JD compared to its earnings, but it is more expensive compared to its turnover next year’s sales more than four times.
The conclusion
JD is still vulnerable to the new audit requirements in the US, but the company still has three years to meet the requirements. Meanwhile, JD will not face any of the other regulatory headwinds that plague Alibaba, and it is still delivering strong growth at a reasonable price.