JD.com Inc (ADR) (NASDAQ:JD) and Alibaba Group Holding Ltd (NYSE:BABA) are having impressive years up 56% and 104% respectively through October 16. Whether you own JD stock or BABA stock you’ve got to be pretty happy as the duo enter 2017’s home stretch comfortably ahead of the benchmarks.
With both growing like weeds it’s difficult to find fault with either company, making an impartial investment by anyone who’s yet to join the party virtually impossible—but doable.
I’ve covered Alibaba a fair bit this year but I’m new to JD.com so why don’t I go through four things investors like to see from growth companies before getting to the nitty-gritty.
There are so many metrics one can use when it comes to a company’s valuation. But for this comparison, I’m going to use something different—price to research ratio—than you’re likely to see from most finance writers.
I’m doing this because both companies will succeed or fail based upon on their technology, so it’s a way to look at them in a different light.
In JD.com’s second quarter it spent $193 million on technology and content. Alibaba spent $693 million on product development expenses. For the sake of time, I’ll merely annualize both numbers and I’ve included share-based compensation for both.
Based on $772 million for JD.com and $2.8 billion for Alibaba, JD stock is trading at 73 times research and Alibaba at 162 times its research spending.
So, by this metric, and it is very back-of-the-napkin, JD.com wins round 1.
Again, trying to look outside the usual metrics, I’ll go with staff costs as a percentage of sales, but here I’ll be using revenues after costs, not before. Lower is definitely better.
JD.com had general and administrative expenses in the second quarter of $139 million which was 8.6% of its $1.6 billion in net sales. Alibaba’s general and administrative expenses in its first quarter were $543 million or 11.3% of its $4.8 billion in net revenue.
JD.com wins again.
Cash Flow Statement
For this one, I have to go with the price to free cash flow (FCF) because in my mind there’s no more critical a number than the amount of free cash flow a growth company is generating.
In this example I’ll use the trailing 12 months free cash flow for both companies using Morningstar data.
In the case of JD.com its free cash flow over the trailing 12 months is $3.0 billion for a price-to-FCF of 18.9. Alibaba’s free cash flow over the same period is $11.0 billion for a price-to-FCF of 41.2, more than double JD.com’s multiple.
From a value perspective, JD.com is the better stock in this comparison. Growth investors probably don’t care.
Finally, I’ll look at which company does a better job generating a return on its capital. Here, I’ll also use Morningstar’s trailing 12-month numbers for operating income, total assets, and current liabilities. Return on capital employed (ROCE) is calculated dividing the operating profit by total assets less current liabilities.
In the case of JD.com it has a trailing 12-month operating loss of $102 million so its ROCE is -1%. Alibaba’s operating profit for the trailing 12 months is $8.5 billion for a ROCE of 13.0%.
On this final metric, there’s no comparison. Alibaba’s balance sheet wins.
Bottom Line on JD Stock vs. BABA Stock
The 40 analysts covering JD stock estimate it will earn $0.84 per share in fiscal 2019. That’s 47 times forward earnings. The 47 analysts covering BABA estimate it will earn $8.34 per share in fiscal 2019 for a forward P/E of 55, slightly higher than JD.com.
While I really like BABA, if JD.com can deliver sustainable and growing profits between now and 2022, JD.com appears to be a buy after its fall swoon has seen its stock pull back from its August highs.
I’d say buy both stocks, but JD.com is the better value.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.