Since its 2014 initial public offering, JD.com (NASDAQ:JD) has been measured against its rival Alibaba (NYSE:BABA). For its part, JD stock has been on a bumpy upswing for most of the year, but that’s not the only similarity.
Alibaba’s share of the market is much larger, which has made it to some investors the simplest play on long-term growth in China. But JD’s logistics expertise and room for market share gains have given it potentially higher growth, making it (usually) a higher-reward, if higher-risk play.
For public investors, in particular, JD stock and BABA stock basically have been the only choices in Chinese eCommerce. Vipshop Holdings (NYSE:VIPS) has had a more narrow focus on the discount space and clearly has lost market share in recent years. (Before a recent rally, VIPS stock had fallen 80%-plus from 2015 highs.). Other large retailers like Gome and Suning are privately held.
But the two-horse race has a new entrant: Pinduoduo (NASDAQ:PDD). Pinduoduo has existed for less time than JD.com has been public, but its growth has been extraordinary. And with JD stock again hitting resistance at $32 ahead of third-quarter earnings next month, it’s fair to wonder if that growth is starting to impact investors’ perception of, and appetite for, JD shares.
When Will Pinduoduo and JD.com Collide?
From a broad perspective, Pinduoduo and JD.com don’t necessarily look like competitors. Both companies are Chinese e-commerce plays, admittedly. But JD.com has taken a broad approach to online retail. (It, as I and others have noted, is much more “the Amazon.com (NASDAQ:AMZN) of China” than is Alibaba, which often is given that designation.) It owns its inventory, unlike Alibaba and Pinduoduo. It’s building out a world-class logistics network.
Pinduoduo, meanwhile, has more of a niche business model. It’s targeted rural and smaller cities. Its selection tends toward the lower end in terms of price, to the point that the company remains dogged by a reputation for counterfeit goods. With the help of Tencent Holdings’ (OTCMKTS:TCEHY) WeChat the company offers special buys for groups.
But the two companies likely are heading for more direct competition. On recent conference calls, JD.com management repeatedly has talked up its effort to move into “lower-tier” (ie. smaller) cities. Meanwhile, Pinduoduo is going in the opposite direction, targeting urban consumers. It’s even sold the Apple (NASDAQ:AAPL) iPhone 11, a noted departure from its core assortment.
In other words, each company is moving onto the other’s turf. So while the battle between JD.com and Alibaba remains important, the fight against Pinduoduo now matters for JD stock as well.
Who Will Win?
As far as stock prices go, PDD is the clear winner of late. While JD stock has traded sideways for seven months, Pinduoduo stock has more than doubled since July. At Wednesday’s closing prices, Pinduoduo actually has a modestly higher market capitalization than does its rival.
In terms of the businesses, JD.com remains ahead. JD.com no longer discloses gross merchandise value, the total value of goods ordered on the platform. But 2018 GMV for Pinduoduo was barely one-fourth that of JD.com. (The revenue gap is far larger, but that’s not an apples-to-apples comparison. Since JD.com owns its inventory, it books 100% of a sale as revenue, while Pinduoduo does not.)
But Pinduoduo no doubt is closing on JD.com for second place in eCommerce market share. Its revenue increased 159% year-over-year in the second quarter. JD.com’s sales grew a still-impressive, but far smaller, 23%. Meanwhile, Pinduoduo actually has more users, even if the GMV gap shows that those users clearly spend less on that platform than do JD.com shoppers.
And there’s some evidence that Pinduoduo is starting to become a real rival to both JD.com and Alibaba. CEO Colin Huang said on the Q2 conference call that 48% of GMV in June came from Tier 1 and Tier 2 cities, up from 37% as recently as January. He claimed that competitors were framing its products as “cheap, because they are low-quality or even knockoffs, [but] today our results have firmly demonstrated otherwise.”
Meanwhile, last week Huang reportedly claimed that Pinduoduo had surpassed JD.com in gross merchandise value. Given figures released by both companies, that seems unlikely (and, according to the report, Huang didn’t cite exact numbers). But Pinduoduo has aimed to move its GMV past that of JD.com for some time now, and at the least it’s making progress toward that goal.
Between 150%-plus revenue growth and the expansion into JD.com’s existing territory, Pinduoduo clearly is becoming a threat. The question for JD stock is to what extent that threat might be priced in.
The Case for JD Stock
It’s possible Pinduoduo’s rise — again, the company was founded only in 2015 — has impacted JD stock of late, particularly with the recent impressive top-line performance from Pinduoduo. JD.com shares have rallied nicely so far this year, gaining 51%. But the stock threatened an all-time low in December, and it still sits over 35% below late 2017 highs.
And at these levels, JD stock still looks somewhat attractive. It’s managed to expand margins nicely this year, and should do so again next year. The current price just below $32 suggests just a 26x multiple to 2020 consensus earnings per share estimates. In this market, that’s not a terribly aggressive valuation, particularly if the company can keep growing revenue by a double-digit percentage clip.
Even with a rising Pinduoduo, that target should be reachable. After all, Chinese e-commerce is not a zero-sum game. Despite trade war pressures, the overall economy continues to rise. E-commerce penetration should increase for some time to come. There is room for more than one winner in China, just as there is in the U.S. And both companies have ambitions to expand internationally, even if those plans remain years off.
Meanwhile, JD.com has responded to Pinduoduo with a text-based app of its own, Jingxi. Jingxi too will have access to WeChat, a notable edge given that Tencent has blocked shopping links from Alibaba’s Taobao for years.
That said, resistance for JD stock has held firmly at $32 for months now. And as I wrote last month, there are risks to the stock. Pinduoduo increasingly looks like another one. It’s going to aggressively compete for market share. In the process, it can drive pricing downward, which can resurrect the margin concerns that plagued JD.com stock in 2018.
I still like JD stock long-term, and I’d bet the stock will break through resistance at some point. But this is not a simple, ‘set it and forget it’ play, and that’s doubly true given Pinduoduo’s rise. JD.com investors will be watching their company’s earnings closely next month — but they should take a long look at Pinduoduo’s results as well.
As of this writing, Vince Martin has no positions in any securities mentioned.