Do you only have room for one Chinese e-commerce name in your portfolio, and you can’t decide between JD.Com Inc(ADR) (JD) and Alibaba Group Holding Ltd (BABA)?
Amazingly enough, you’re not alone in that highly specific internal debate; just one of them is enough to make a play on a rebound in China when there are so many other great U.S. and other non-U.S. stocks also begging to be bought.
Sure, you could toss a coin — heads is BABA stock and tails is JD. That’s an arbitrary approach which isn’t even necessary, however. The two companies are currently different enough that one stands out in front of the other.
Keep reading to find out which is which.
What’s So Great About JD?
For anyone that’s not heard yet, last quarter was an encouraging one for JD.com.
Although an economic headwind is still brewing in China at the same time e-commerce players are starting to feel the effects of a fairly saturated market, JD still managed to do better than expected in its fourth quarter. The company reported revenue of 54.6 billion yuan (about $8.3 billion), topping estimates for 51.8 billion yuan worth of sales. The company also facilitated 145.3 billion yuan ($22.2 billion) worth of sales last quarter, up 69% on a year-over-year basis.
To the extent it means anything (which isn’t much), JD posted an operational loss of 656 million yuan.
For the current quarter, JD.com anticipated revenue growth of between 45% and 50%, which serves as an approach to profitability, and topping analyst expectations for Q1.
The startup-to-breakeven-to-thriving path JD.com is on isn’t atypical. More important to would-be buyers, there’s now a legitimate light at the end of the tunnel. Perhaps more important (and this is a largely overlooked factoid about JD), it procures and sells much of its own merchandise in addition to letting other retailers use its site as a sales venue. While it’s the source of many headaches for the company, in many ways this nuance lets JD.com control its own destiny.
What’s So Great About BABA?
The self-supply of goods JD enjoys is in contrast to the Alibaba business model, which relies almost entirely on third-party resellers to fill up its online catalog.
That hasn’t held BABA back, of course. Last quarter, its revenue grew 32% on a year-over-year basis on a 23% improvement in gross merchandise volume. Non-GAAP profits were up a bit less, growing 25%, but that was still more growth than analysts were expecting.
Based strictly on a comparison of each company’s most recent quarter, JD.com is the hands-down winner versus BABA stock, knowing real profits for JD are on the way. As is so often the case, though, there’s more to the story than just the numbers.
Yes, Alibaba is looking for a $4 billion loan to fund unspecified expansion. Worse, it’s looking to several different banks to come up with the money, tantamount to a consumer running up debt on several credit cards because he/she is alarmingly maxed out on one.
It may be worth the uncertainty, however.
Aside from the recent news that CEO Jack Ma and a couple of other executives were chipping in $500 million of their own money as part of a $4 billion stock repurchase program — a figure that’s suspiciously the same as the loan the company is seeking — JPMorgan analyst Vivian Hao made a compelling argument when she initiated coverage on BABA stock, saying:
“In our view, the market has not given credit to BABA’s robust monetization improvement on the back of differentiated positioning of Tmall/Taobao, overall healthier ecosystem around a user-centric culture, and accelerated business diversification, such as cloud computing.”
Hao set a target price of $90 for BABA stock, categorizing it at an “overweight.”
And the Winner Is…
So which is the better play — JD or BABA stock? As much fun as it would be to root for the underdog against the annoyingly dominant name in China’s e-commerce space, Alibaba is the way to play China’s consumerism right now.
It wasn’t a completely lopsided duel, mind you. Alibaba is still contending with the impact of the country’s crackdown on counterfeit goods, and just last week investors were given the bad news that an online coding system developed for the nation’s drug regulators was being dropped by authorities, revoking Alibaba’s rights to the coding system platform, and squelching its revenue potential.
It just doesn’t matter. Whether it’s the most profitable and most intelligent business model in China’s e-commerce scene or not, it’s entrenched and unmovable. It’s up to its competition to take what Alibaba already has, and that’s just not going to happen. Alibaba can leverage its big muscles to keep other players from making a dent.
It’s certainly not a finesse play, however, and don’t forget … buying neither stock is also an option.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
