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Alibaba vs. JD.com: Which Chinese Retail Stock is a Better Pick?

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·6 min read
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The retail market in China is experiencing a significant boom in sales. According to the National Bureau of Statistics in China, this market was worth RMB 39 trillion last year. The online retail penetration in China stood at 24.9% last year, up from a mere 6.2% in 2012.

According to data from iResearch, the Chinese online retail market could have a gross merchandise value (GMV) of RMB 15.1 trillion by 2023, growing at a compounded annual growth rate (CAGR) of 10% between 2020 to 2023.

Using the TipRanks Stock Comparison tool, let us compare two Chinese e-commerce companies, Alibaba and JD.com, and see how Wall Street analysts feel about these stocks.

The author is neutral about both Alibaba and JD.com.

Alibaba (BABA)

Alibaba Group Holding Ltd. is a Chinese e-commerce giant that also offers cloud computing services, shopping search engines, and electronic payment services.

In fiscal Q1, the company’s revenues rose 34% year-over-year to $31.87 billion but fell short of analysts’ expectations of $32.54 billion. Adjusted EPS increased 12% year-over-year to $2.57, beating the Street’s estimate of $2.24.

Daniel Zhang, Chairman and CEO of Alibaba Group said, “For the June quarter, global annual active consumers across the Alibaba Ecosystem reached 1.18 billion, an increase of 45 million from the March quarter, which includes 912 million consumers in China.”

The company’s management added that it continues to invest its “excess profits and additional capital to support our merchants and invest in strategic areas to better serve customers and penetrate into new addressable markets.” (See Alibaba stock chart on TipRanks)

Needham analyst Vincent Yu noted that the company’s investment in Taobao Deals seems to be paying off, as the number of annual active customers rose to 190 million for the last 12 months ending on June 30. BABA had stated in an earlier earnings call that it was looking at strengthening its investment in Taobao Deals, which offers value-for-money products for price-conscious consumers.

In Q1, Alibaba also “deepened the development of our Community Marketplaces business that offers next-day pickup in select regions.” This has resulted in the GMV and gross floor area of its regional distribution centers (RDC) rising 200% and 260%, quarter-on-quarter, respectively.

Analyst Yu believes that the investments in these two core areas will increase in the second half of the year. The analyst was upbeat about the stock following the fiscal Q1 results and reiterated a Buy and a price target of $330 (104.9% upside) on the stock.

When it comes to customer management revenue (CMR), it went up 14% year-over-year to $12.55 billion, primarily due to the rise of “online physical goods GMV on our China retail marketplaces,” according to Alibaba management.

Yu was of the view that Alibaba did well when it comes to CMR, in spite of a challenging environment. However, looking ahead for the year, the analyst is of the opinion that the recent flood in Henan and the rising number of COVID-19 cases in China could result in more uncertainty for BABA’s CMR outlook.

The company’s cloud computing business experienced a slower rate of growth in revenues, with only 29% growth, largely “due to revenue decline from a top cloud customer in the Internet industry which has stopped using our overseas cloud service due to local regulatory requirements,” according to management.

Adjusted EBITA margin for this business came in at 2% and analyst Yu expects “to see similar growth for the rest of 2021 with adj. EBITA margin remaining at ~2% for the full year.”

The company also commented on the changes in the regulatory environment on its earnings call, saying, “We are in the process of studying the regulatory requirements, evaluating the potential impacts on our relevant businesses, and we will respond positively with actions.”

Analyst Yu came away optimistic about BABA’s ability to navigate the regulatory environment “and [believes that BABA] is poised to grow in several business areas in which price competition has long dominated markets.”

Turning to the rest of the Street, consensus is that Alibaba is a Strong Buy, based on 21 Buys, 1 Hold, and 1 Sell. The average Alibaba price target of $272.82 implies an approximately 61.4% upside potential from current levels.

JD.com (JD)

JD.com is a Chinese e-commerce platform that reports primarily under three business segments: retail, logistics, and new businesses.

Yesterday, the company announced its Q2 results, with revenues of $39.3 billion, an increase of 26.2% year-on-year, surpassing analysts’ estimates of $38.51 billion. Adjusted diluted net income per American Depository Share (ADS) came in at $0.45, ahead of analysts’ expectations of $0.36.

Sandy Xu, CFO of JD.com, commented, “Our consistent execution and successful 618 Grand Promotion helped us to add over 32 million new users in Q2, the largest single quarter increase in JD.com’s history.”

The company’s annual active customer accounts went up by 27.4% year-over-year to 531.9 million in the last twelve months ending on June 30. (See JD.com stock chart on TipRanks)

JD’s retail segment made up 91.7% of the company’s total revenues, with revenues of $36.01 billion. According to Stifel Nicolaus analyst Scott Devitt, the rise in revenues for this segment was led by a growth in general merchandise sales of 29% year-over-year, and growth in electronics of 20% year-over-year.

The analyst further elaborated, “General merchandise sales growth was led by the following supermarket categories: food & beverage, cleansing and personal care. The platform's mix continues to shift towards lower-ticket, higher frequency items in the supermarket and healthcare verticals.”

Analyst Devitt reiterated a Buy and a price target of $85 (29.3% upside) on the stock following the Q2 results.

JD is also looking at reducing its fulfillment costs by adopting an omnichannel strategy for the retail segment and “leveraging warehouse and inventory resources of off-line business partners.” Fulfillment costs are the total costs involved from receiving the product, handling, and distribution.

According to Devitt, the company expects the momentum in the retail business segment to continue this year.

When it comes to the regulatory crackdown in China that has worried investors, the company’s management stated on the earnings call that “these changes are essentially adaptive efforts made by the government as the industry undergoes high-speed growth. Regulators are working to bring platform economy-based enterprises into a standard regulatory framework.”

The company does not believe that the regulatory changes are “intended to restrict or suppress the Internet and relevant industries but rather to create a fair and orderly business environment.”

However, analyst Devitt expects that “the regulatory backdrop in China will remain an overhang on the group limiting visibility.”

Summing up, the analyst concluded, “The China eCommerce market exceeds $1T in sales with online penetration of above 20%, and we believe JD is well-positioned to continue to participate in China consumer and retail expansion for years to come. Monetization of assets outside of JD.com core retail operations supports additional upside in shares.”

Turning to the rest of the Street, consensus is that JD.com is a Strong Buy, based on 10 Buys and 1 Sell. The average JD.com price target of $93.82 implies an approximately 29.6% upside potential from current levels.

Bottom Line

While analysts are bullish on both stocks, based on the upside potential over the next 12 months, Alibaba seems to be a better Buy.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article

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