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Alibaba’s Dominance Spooks Would-Be JD.Com Inc Stock Investors

Dana Blankenhorn

They call the market battle between JD.Com Inc (ADR) (NASDAQ:JD) and Alibaba Group Holding Inc (NASDAQ:BABA) the “great cat and dog war” because of their mascots, JD.Com using a metal dog and Alibaba a cartoon cat. Really, though, JD stock isn’t that competitive.

Alibaba stock has consistently outperformed JD stock over any period you might name. That is going to continue after JD.Com posted great earnings some analysts still found disappointing.

Despite JD.com growing revenues by one-third and more than tripling net income, the numbers still managed to disappoint analysts over spending on warehouses and physical stores.

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One hedge fund manager even called out CEO Richard Liu personally, accusing him of “silly deals” and of over-hyping the stock, which has a market cap of $52 billion.

Big Cat Eats Little Dog

While Alibaba and JD.Com are considered direct rivals, Alibaba’s market cap is 10 times bigger, at $509 billion, and it is moving steadily to eat into JD.Com’s advantages in logistics and retail stores.

Alibaba came to prominence with an “assets light” strategy that still let it bring over half of its revenue to the net income line as recently as 2016. But more recently it has since gone directly at JD.Com, building out physical malls and adding all its technology to them.

Alibaba began life connecting small goods producers to urban markets, while JD.Com began life as an ecommerce company more akin to Amazon.Com Inc. (NASDAQ:AMZN).

The approach of JD.Com, has always been based on last-mile delivery, everything from electric bikes (China also has a gig economy) to delivery drones. Its JD Logistics, which it lets others use in the way of Amazon offers its fulfillment services, is valued at $11 billion, one fifth the size of the entire company, and JD.Com owns over 80% of it. 

But it is wrong for investors to directly compare the situation in China with that of the U.S., because Chinese companies don’t “stay in their lanes,” instead marrying online services, online shopping, and offline shopping into vertical silos that can command total loyalty. Think Google malls and Apple Inc. (NASDAQ:AAPL) delivery.

While Amazon is the only U.S. company effectively combining online and offline operations, this is old hat in China, where JD.Com is building out a network of 500 7Fresh stores with “smart carts” that help direct shoppers to the goods.

But here it’s getting stiff competition not only from Alibaba but from Tencent Holdings (ADR) (OTCMKTS:TECHY), the owner of WeChat, whose market cap is approaching $600 billion.

Tencent has invested in the Chinese retailing unit of Carrefour SA (OTCMKTS:CRERF), whose giant shops with multi-story car parks, akin to a U.S. Walmart Inc. (NYSE:WMT), have long been a feature in many Chinese cities.

The idea is that Tencent will bring technology to Carrefour that makes them more competitive with Alibaba and JD.Com, then Carrefour will take that kind of shopping worldwide.

The Bottom Line on JD Stock

Investors don’t like competition and this fierce competition, in which JD.Com is by far the smallest player, is taking a toll on JD stock. The shares are down 16% so far in 2018, and with market cap being an important currency in acquisitions this has hurt its overall position.

There remain investors who love the JD stock growth story and CEO Liu, who is worth an estimated $9.2 billion.  But analysts are no longer buying it. The last few months have seen a slow, steady march of ratings from buy to hold on JD.Com stock, as they recognize that Liu’s company is outgunned and directly in the line of competitors’ fire.

This is the way capitalism is supposed to work, but it’s not the way investors like to play.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and BABA.

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