JD.com (JD -3.18%) and Alibaba (BABA -1.19%) are two of the largest e-commerce companies in China. JD.com is the country's largest direct retailer by annual revenue, while Alibaba's Taobao and Tmall are its top third-party online marketplaces.
Both of these stocks were once considered promising blue chip plays on China's economic growth. But their stock prices both declined more than 70% from all-time highs as they grappled with macro, competitive, and regulatory headwinds. So should investors buy either of these out-of-favor Chinese stocks as a contrarian play?
Image source: Getty Images.
The similarities and differences
JD still generates most of its revenue from its first-party marketplace, but it's been expanding its third-party marketplace to reach more merchants and customers. Alibaba's Taobao facilitates consumer-to-consumer transactions, while Tmall is a third-party marketplace for larger merchants and brands.
JD and Alibaba both handle their shipments through their own logistics subsidiaries, which provide additional fulfillment and delivery services for their external customers. JD spun out its unit, JD Logistics, in an IPO in 2021. Alibaba originally planned to spin out its Cainiao logistics unit in a similar IPO, but it scrapped those plans earlier this year.
Alibaba also owns the Southeast Asian marketplace Lazada, the Turkish marketplace Trendyol, and the cross-border marketplace AliExpress. JD hasn't meaningfully expanded its core e-commerce marketplace beyond China yet.
Alibaba's other major business is Alibaba Cloud, the largest cloud infrastructure platform in China. JD hosts its own cloud, fintech, and healthcare platforms -- but it bundles all those smaller units together in its "new businesses" unit. Both companies have considered spinning off their non-core businesses with fresh IPOs to raise fresh cash.
JD and Alibaba once held a near-duopoly in China's e-commerce market, but they both face fierce competition from PDD (PDD -1.44%) in the discount goods and online produce markets. PDD is still growing much faster than JD and Alibaba.
Which company is growing faster?
JD's revenue rose 28% (in yuan terms) in 2021, 10% in 2022, and 4% in 2023. That deceleration was caused by China's zero-COVID lockdowns, its sluggish economic growth, and stiff competition from PDD and Alibaba. JD tried to keep up with PDD with its own discount marketplace called Jingxi, but it downsized that struggling business in 2022. Analysts expect its revenue to rise 5% in 2024 as the macro environment stabilizes.
Alibaba's revenue grew 19% (in yuan terms) in fiscal 2022 (which ended in March 2022), but rose just 2% in fiscal 2023 and 8% in fiscal 2024. Its e-commerce business faced the same macro and competitive headwinds as JD, but its slowdown was exacerbated by an antitrust crackdown in 2021 which forced it to halt its exclusive deals with merchants and rein in its loss-leading promotions. Its cloud business also cooled off as the macro headwinds drove more companies to rein in their spending. But looking ahead, analysts expect its revenue to rise another 8% in fiscal 2025 as China's economy stabilizes and it continues to expand its higher-growth overseas e-commerce marketplaces.
In comparison, PDD grew its revenue at a compound annual growth rate (CAGR) of 61% from 2020 to 2023, and analysts expect 68% growth in 2024. That breakneck growth will be largely driven by the expansion of its online agricultural platform and Temu, its cross-border marketplace, which is gradually creeping up on Amazon in the U.S. market.
Which company is more profitable?
JD generates most of its revenue from its capital-intensive first-party marketplace, so it runs its business at much lower operating margins than Alibaba -- which generates most of its revenue from its higher-margin third-party marketplaces.
Source: YCharts.
But over the past three years, both companies focused on stabilizing and growing their operating margins with aggressive cost-cutting measures. JD's earnings per share (EPS) more than doubled in 2023, and analysts expect 28% growth in 2024. Alibaba's EPS rose 14% in fiscal 2024, and analysts anticipate 34% growth in fiscal 2025.
Both stocks are cheap relative to those estimates. JD trades at just 10 times forward earnings, while Alibaba has a slightly higher forward multiple of 13. But their valuations are being compressed by the escalating geopolitical tensions and tech war between the U.S. and China -- and they probably won't command higher valuations until that relationship improves.
The better buy: Alibaba
JD and Alibaba will probably both bounce back quickly if the U.S. and China can peacefully settle their differences. However, Alibaba's broader diversification and stronger growth rates should make it a better turnaround play than JD, which could struggle to widen its moat and expand its business beyond its core online marketplace.
