Co-founder and Chief Rule Breaker David Gardner is one of the great investors of our day. No investment better personifies his venture capital-esque approach to picking stocks than his decision in 1997 to invest in a small book-seller named Amazon.com.
Since then, the stock has advanced 37,300%. I definitely don't think the hot stock I'm calling out for November will achieve the same results -- but it does have an awful lot in common with Amazon during its early days.
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That stock is JD.com (NASDAQ: JD), a company that many have dubbed "the Amazon of China." Below, I'll explain why I think JD is a better investment than behemoth Alibaba (NYSE: BABA), and why I'll be putting my own money behind the stock when Motley Fool trading rules allow.
Playing a different game than Alibaba
Right now, Alibaba is the unquestioned leader of China's e-commerce space. The company is valued at $480 billion, eight times the size of JD. Its gross merchandise volume (GMV) -- a measure of how much was sold on its platform -- was $570 billion last year. JD's was much less: $95 billion. And Alibaba is solidly profitable, while JD has yet to turn an annual GAAP profit.
And yet, it's JD that I'm throwing my money behind. That's because the company is playing the uber-long game, while Alibaba quickly capitalized on the e-commerce trend to become the leader in what -- in my humble opinion -- will be a smaller sandbox.
While it would be an oversimplification on one level, for the purposes of this article it's enough to say that Alibaba is a lot like eBay. Alibaba maintains a platform where buyers and sellers can buy and sell things.
By becoming one of the most popular sites in China, Alibaba's Taobao has the network effect working in its favor: as more customers flock to the site, even more vendors will list there. And it's all very capital light.
JD is taking the exact opposite approach: capital heavy with huge upfront investments. In fact, it's arguably going even further than Amazon. By the end of last year, JD had 256 fulfillment warehouses and over 6,900 delivery and pickup stations spread throughout China. Impressively, the company even controls the last mile of delivery, and can guarantee same or next-day delivery in 1,400 counties and districts in China.
That type of network means that JD can control inventory -- a big deal in China, where counterfeiting is rampant -- and can also offer quicker delivery than anyone. If anyone wanted to challenge that next-day delivery promise, it would be prohibitively expensive to match JD's scale, giving the company a wide moat for investors to count on.
The advantages have just started surfacing
Of course, the promise of such fast delivery doesn't matter if you can't attract buyers or spit out free cash flow. But over the past three years, the tide has convincingly turned in JD's favor.
243 billion yuan
447 billion yuan
658 billion yuan
788 billion yuan
115 billion yuan
181 billion yuan
260 billion yuan
311 billion yuan
Free Cash Flow
(0.13 billion yuan)
(1.13 billion yuan)
6.39 billion yuan
19.3 billion yuan
Data source: SEC filings. TTM = Trailing twelve months.
Trends in both GMV and revenue -- growing annually at 60% and 49% clips, respectively -- should be proof enough that Chinese citizens are using JD more and more. But it is the booming growth in free cash flow that should have investors really excited.Â While the company is far from taking its foot completely off the pedal, the investments in infrastructure that it has made since 2007 are clearly paying off.
And yet, I don't think the stock is too outrageously priced. That free cash flow figure above translates to roughly $2.9 billion. That means it trades for less than 20 times trailing free cash flow. It also has a solid balance sheet, with $9.5 billion in cash and investments and just $2.5 billion in debt.
Given the moat that JD's fulfillment network provides, evidence of its increasing popularity in China, solid financials, and a very reasonable price tag, I'm confident in naming this as my "hot stock to buy in November."
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, eBay, and JD.com. The Motley Fool has a disclosure policy.