[Editor’s note: This article was corrected on July 30, 2019.]
I’d be interested to know how many InvestorPlace contributors would buy JD.Com (NASDAQ:JD) stock and how many would buy its archrival, Alibaba (NYSE:BABA). Both JD stock and BABA stock are up big in 2019; I’m sure some people would say “buy both” and a few might say “buy neither,” given the run they’ve been on.
Perhaps one of our editors will put up a poll.
In the meantime, I’ll provide my two cents on JD stock and Alibaba stock and reveal which of the two I prefer.
What I Like About JD Stock
It’s been a while since I last wrote about JD stock. I got off the bandwagon of JD stock when its CEO and founder, Richard Liu, was accused of raping a 21-year-old student in August 2018. While the Minnesota police never pressed charges against Liu, the allegations left a bad taste in my mouth.
However, there was a time when I thought JD stock price could climb more than Amazon (NASDAQ:AMZN).
In a January 2018 article about JD stock, I compared nine years of financial data from JD and AMZN at approximately the same point in their corporate histories. I concluded that JD.com’s growth rate was as much as six times higher than Amazon’s.
I’ll admit it wasn’t an entirely scientific, apples-to-apples comparison, but the evidence was enough for me to end on the following note:
“Combine the difference in growth rates with the analyst estimate that JD.com will earn $0.33 per share in fiscal 2018 and $0.75 in fiscal 2019, and you’ve got a clear winner,” I wrote in an article published on January 29, 2018. “Unless you’re unwilling to take the risk of owning Chinese stocks, history tells me you should go with JD.com. However, if you can own both, you should,” I added.
JD stock price is down considerably from where it traded (above $50) in January 2018. Amazon is up 41% during the same period. I’m glad I said investors should buy both if they can afford it.
Interestingly, I mentioned analysts’ average fiscal 2018 and 2019 earnings estimates of 33 cents and 75 cents, respectively, for JD. The company delivered EPS of 34 cents in 2018. Analysts, on average, now expect 2019 EPS of 51 cents and EPS of 68 cents in 2020.
I also said that if JD continued to turn its inventory every 38 days or faster, JD stock remained a buy. In 2018, JD turned its inventory every 37.3 days, an indication that it continues to run an efficient e-commerce business.
And none of this takes into account all the progress of JD.com’s logistics business, something InvestorPlace’s James Brumley recently discussed.
Brumley is impressed by how much thought went into the development of the company’s logistics solutions, which have spurred the launch of other businesses, making the unit a profit center for the company.
Over the long-term, as JD builds its international business, the logistics head start will boost JD stock.
What I Like About BABA Stock
In Alibaba’s latest reported fiscal year, it generated free cash flow of $15.6 billion on $377 billion of revenue. In JD.com’s most recent reported fiscal year, it generated free cash flow of -$1.1 billion on revenue of $67.2 billion.
The InvestorPlace contributors who like JD stock would remind me that JD.com’s free cash flow is negative because of the increased capital expenditures it made in 2018 to keep its business growing.
A quick look at JD’s fiscal Q1 shows that it generated $190.7 million of free cash flow in the quarter, a significant turnaround from -$1.3 billion in the same quarter a year earlier. While that’s a considerable improvement, it’s nowhere near the free cash flow generating power of Alibaba.
JD converted 1.1% of its $18.0 billion in quarterly revenue to free cash flow. That compares to 27.8% for Alibaba. End of story.
And don’t get me started on Alibaba’s cloud business. JD has focused on logistics, but the cloud delivers much higher profits. As Alibaba continues to grow its cloud business, investors will almost forget that it’s an e-commerce company.
Alibaba might have a lot of moving parts, but they’re moving in the right direction.
The Verdict on JD.com Stock and Alibaba Stock
Aside from the allegations against JD’s CEO, I do like what JD.com is doing to grow its business. In many respects, it’s built a logistics behemoth that will be able to handle significantly higher merchandise volumes than it’s currently handling — and that’s great news for the owners of JD stock.
I also like all the things Alibaba’s doing to conquer the world while generating tremendous amounts of free cash flow. Those trends are certainly positive for Alibaba stock.
If the allegations against JD’s CEO had never been made, I’d have a tough time picking between JD stock and BABA stock, but I but would ultimately side with Alibaba stock.
However, I can’t put aside the accusations, regardless of the fact that charges were never filed. The allegations are causing me to stay away from JD stock.
Over the long-term, both BABA stock and JD.com stock will do well, but I’d go with Alibaba if I had to buy one or the other.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.