JD.com (JD), Alibaba (BABA): one stock to sell, one to buy

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Earlier I wrote on Alibaba (NYSE: BABA) and the fact that I would not buy the shares of this company at this time since I now expect a full-scale recession. However, I would like to compare JD.com (NASDAQ: J.D.) and Alibaba because I consider the latter to be a much better choice for investors than JD. This is explained by Alibaba’s leading position in the e-commerce market, but above all by its profitability. But let me explain this to you in a little more detail.

The e-commerce market in China

E-commerce retail sales in China

Trade.gov

Currently, China is the largest e-commerce market in the world. It alone generates nearly 50% of global transactions. According to eMarketer, in 2020 in China, there were 710 million digital buyers, while the transaction volume amounted to $2.29 trillion in 2020. Some analysts predict that China’s e-commerce market will reach 3, $56 trillion by 2024.

The chart below shows the market shares of Alibaba (TMall), JD.com and the other three small companies working in the business-to-consumer sector for the year 2020, respectively.

The Chinese e-commerce market

TMO Group

Based on this diagram, Alibaba is almost twice as big as its closest competitor JD in terms of e-commerce market share, while other companies operating in the same industry are much smaller than BABA and JD. com.

JD and BABA – Financial indicators

But let’s look at several other factors used to compare companies. These are sales, profit, employees, ROCE (return on capital employed) and market capitalization.

I prepared a table comparing the indicators for BABA and JD.

Ali Baba

JD.com

Recently reported annual sales (billions of dollars)

134.57

149.3

Recently reported annual net profit (billions of dollars)

9.77

(1.58)

Number of employees

251 462

298717 (from 2021)

Recently reported ROCE (%)

6.19

1.2

Market capitalization (billions of dollars)

328

105.7

Source: Prepared by the author

Interestingly, despite the fact that BABA’s market share in the e-commerce market is higher than JD’s, BABA’s total revenue is currently slightly lower than JD’s.

At the same time, Alibaba is showing a much better revenue growth performance than JD has for many years.

Chart
Data by YCharts

As the chart above shows, JD’s revenue grew by only 4,410%, while Alibaba’s sales grew by 13,290% over the past 10 years.

Chart
Data by YCharts

As for the net profit of JD and BABA, they decreased in 2021. However, the net profit of JD turned negative, while the net profit of BABA fell by almost 50%.

Chart
Data by YCharts

If we take the recent 5-year period, we will see that BABA’s net profit has increased, while JD’s has turned negative.

So, we can say that BABA is more efficient than JD. This is especially true if we look at each company’s ROCE ratio. Despite the fact that JD’s workforce is still larger than BABA’s, JD is less able to generate profits.

Credit ratings

Now a few words about the credit ratings of the two e-commerce companies. Alibaba’s Fitch rating is A+, which is an upper average rating. JD’s S&P Global credit rating, meanwhile, is below-medium grade or BBB.

BABA has plenty of cash. Its total cash and investments amounted to $71.77 billion, its current liabilities totaled only $60.53 billion, while its total liabilities were $98.26 billion. The current ratio of BABA (current assets/current liabilities) is $100.71 billion/$60.53 billion = 1.66. A value greater than 1.5 is considered good. It is widely expected that the average annual free cash flow over the next few years will be quite high but, at the same time, affected by higher investments and anti-monopoly fines.

Fitch also expects the gross leverage of funds from BABA operations to be 1x or less. Alibaba reportedly has strong net cash. Alibaba’s debt level is very moderate, while its cash is high. That’s why it doesn’t need substantial earnings growth to maintain a strong financial profile. In fact, its core e-commerce business alone is enough to fund capital expenditures, investments, and other business costs. Inspiring is also the fact that Alibaba can buy back its shares. In my opinion, it’s much better when a company pays dividends. But buyback programs help keep stock prices stable.

As shown in the excerpt below, Alibaba has been recording positive net profits for many years already and also increasing its profits for many years. Thus, it seems that only the recent reference period was punctual.

Net Income - Alibaba

Looking for Alpha

JD.com is a company with a diversity of products and a conservative financial structure. Among the company’s strengths are non-electronic products, logistics services and service quality improvement.

Its total cash and investments stood at $28.48 billion, its current liabilities at $34.54 billion, while total liabilities were $40.43 billion. However, the current ratio seems to be acceptable. The current ratio of JD is = $45.62 billion / $34.54 billion = 1.32. It’s above 1. But JD’s balance sheet still looks poorer than Alibaba’s.

But the very fact that JD.com cannot provide a strong bottom line track record puts it at a pretty disadvantage compared to its close competitor BABA. The recently announced lackluster revenue results weren’t “unique,” as can be seen in the excerpt below. 2018, 2017, 2016 and many other years have seen net losses, which alone should make investors doubtful about buying JD stock.

Net income - JD.com

Looking for Alpha

Risks

I would argue that both companies face huge risks as the global economy teeters on the brink of a major recession. Both JD and BABA depend on consumer demand, which will fall during a recession. This is, in my opinion, the biggest risk. However, in my opinion, JD will be affected more substantially than BABA since the latter is a profitable business.

But, in my opinion, political pressure poses a greater risk to BABA than JD. When the Chinese government decided to introduce stricter regulations for local high-tech companies, BABA was the first to take the hit, unlike JD. One only has to check the financial news headlines related to Chinese anti-monopoly regulations to see that Alibaba was a very big target. It all started at the end of 2020 and still worries investors today. For example, the arrest of a man in Hangzhou in early May, surnamed Ma, briefly wiped tens of billions of dollars from Alibaba’s valuation. The market, however, was wrong at the time since the person arrested was not BABA’s founder, Jack Ma. This is significant because it seemed plausible to investors that tougher action against BABA and its founder would imposed by the Chinese government.

Ratings

As I mentioned in my other article on Alibaba, by many ratios, Alibaba’s stock is priced more attractively than its closest rival, JD.com.

But if we take a look at these two extracts from Seeking Alpha, we will see that Alibaba’s stock seems to be cheaper. In other words, it is trading closer to its 52-week lows than JD.

Ali Baba

52 week range

Looking for Alpha

JD.com

52 week range

Looking for Alpha

In the chart below, we can also see that shares of BABA have become significantly cheaper than those of its close competitor over the past 3 years, making Alibaba a better choice.

Chart
Data by YCharts

At present, JD’s price/earnings (P/E) ratio is negative. It has been negative for several consecutive years. However, Alibaba’s P/E is around 38. That’s certainly high, but the number is due to the fact that its recently reported earnings fell by 50%, mainly due to a decline in the value of its investments.

Chart
Data by YCharts

However, as I mentioned before, JD’s sales even surpassed Alibaba’s. That’s why JD’s price-to-sales (P/S) ratio is much better than that of its nearest rival, BABA. But BABA’s P/S ratio is also quite low, just around 2, while a good ratio should ideally be below 3. But P/S is the only valuation criterion where JD is better than BABA.

Chart
Data by YCharts

Despite JD’s balance sheet being poorer than BABA’s, JD’s P/E ratio is significantly higher, suggesting clear overvaluation.

Chart
Data by YCharts

So, I would say that despite its lack of profitability, JD is more overvalued than Alibaba.

Conclusion

The main downside risk for JD and BABA is that of a deep recession. But loss-making companies like JD are more vulnerable to such a threat than profitable companies. Moreover, JD is more overvalued than BABA, while BABA has a stronger position in Chinese e-commerce. Second, Alibaba’s financial position is more stable and its credit rating is significantly higher than that of JD.com. However, Alibaba faces more political pressure than JD. Overall, if you are considering investing in e-commerce in China, I would suggest buying Alibaba long term and selling JD.

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