BABA vs JD

Investment Analysis Clubs Saul’s Investing Discussions
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I know Saul is not into Chinese investments, but BABA has come up in a few posts here, so I wanted to get some thoughts on JD vs BABA.

With how great Amazon has been doing, I have been focusing on e-commerce opportunities in other parts of the world given the likely increased e-commerce over the next couple of decades. I already have a position in MELI, the Latin American version of AMZN and PayPal.

I have started looking at JD given that the Fool likes it and it is going after a huge market. The growth looks good and the valuation based on price over sales and cash flow don’t seem expensive to me. Obviously, JD will look expensive based on earnings as they appear to invest the earnings back into the business. Even in 2010, Amazon was expensive on a PE basis, but now they are up 10 fold.

Based on analyst estimates, JD is forecasted to have revenue of $55B this year and $71B next year. They partnered with Wal-Mart and Tencent, both of which are motivated to see JD do well given their ownership stakes. Tencent has over 900M users and will promote JD to them. JD is gaining on BABA, which it trailed 54.6% to 17.7% in 2014. Now the lead is down to 51.3% to 32.9%. https://www.emarketer.com/Article/Alibabas-Tmall-Maintains-E…

JD has the Amazon model in having control over the products and logistics vs BABA which uses the 3rd party EBAY model. BABA has experienced counterfeiting, which JD can more easily combat given their control over processes. We already know that the Amazon model has done better than the EBAY model in the US. Given that JD is growing faster and has a better model, you would expect that JD would have a higher valuation per share. This would make sense given that they are smaller and have more room to grow, however that does not appear to be the case. JD’s market cap is only $53B, giving it a 0.96 times sales valuation using 2017 sales and a 0.75 times 2018 sales. Looking at the trailing 12 month free cash flow of $4.3B, they are valued at only 12.3 times FCF, which looks cheap given the growth.

I tried comparing valuation to BABA, but they don’t seem to measure revenue the same way given their different models. BABA with its $459B valuation is trading at 13 times current year sales estimates. BABA is obviously bigger, but only has projected revenues of $35B for the year. Since the 3rd parties do the work, they can probably only consider their cut of the transactions as their revenue, while the full transaction value for JD would be considered revenue. This is the only explanation that makes sense to me considering BABA’s valuation is 8.6 times bigger than JD, but has smaller revenues. Has anyone here looked into this?

Regardless of BABA’s valuation, JD does appear to be cheap trading at only 0.75 times 2018 sales and 12.3 times prior 12 month free cash flow. I have not looked into JD that much, but it would be good to hear what others think about why JD is valued this way given the huge market opportunity and strong growth shown so far.

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there is one big difference between JD and BABA. Since August BABA price gain has run away from JD.
probably because of this report

http://www.investors.com/news/technology/jd-com-revenue-soar…

so perhaps JD is now a “turnaround” and investors have lots of high growers that don’t need to turn around. Was last quarter’s loss a one time event? Who knows. Probability wise ,a bad quarter is usually followed by another bad quarter.
huge market opportunity and strong growth shown so far.
lots of companies meet that criteria

the conference call transcript might worth looking at

https://seekingalpha.com/article/4098798-jd-coms-jd-ceo-rich…

let us know what you think. Because there does seem some opportunity here, and e retail is bound to get bigger in China.

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Hey wouter!

Alibaba is totally asset light, just a third-party marketplace where people can buy and sell. This is extremely high margin, I believe Alibaba’s gross margins are 65%. So their business model is very much different from even Amazon’s retail segment. The majority of Amazon’s retail revenue is still first-party where they pay suppliers and take a razor-thin margin.

This is similar to JD.com’s model. They pay suppliers and act as a first-party platform, just marking-up products slightly. It shows. Their gross margins are very low currently, around 8%. It makes sense that JD.com trades for about 1x 2017 sales and Alibaba around 13x 2017. So inherently, the business models are night and day. 65% gross margin vs. 8%. BABA runs a pretty high net margin as well. It may be overvalued but the numbers are pretty impressive to say the least. Comparing JD and BABA based on price to sales does not paint a clear picture when the margins are so different though. It is better to value based on cash flow like you mentioned because of the high depreciation costs. I also think, JD has less of the global appeal so international investors, at least in the US, have bid up the price of BABA and JD is more under the radar. At these prices, I do think JD is the more compelling play based on market share numbers and growth projections.

Here’s a couple interesting things about JD.com though.

First, they are transitioning to more of a third-party marketplace. This segment doubled in revenue last year so they are realizing the potential profitability in this space. So why would someone list on JD.com when Tmall is so much bigger? Well, businesses have price wars on Tmall because there are so many sellers. Hence, Alibaba’s sky-high gross margin. So JD.com could attract some sellers that are fed up with that. But here’s the kicker. JD.com’s logistics network is ridiculous. They have been building it for a long time now and this is the real competitive advantage. They have a plethora of warehouses and trucks and delivery systems. It is extremely capital intensive but no one else will have the control over the delivery chain they do. It’s like if Amazon owned FedEx. Imagine how fast they could deliver things? This is the vision of JD.com’s management. Having a delivery chain that is fully vertically integrated is such an advantage in efficiency and quality control. They know where all of their inventory is and they can get it to where it needs to go and quickly.

I remember reading awhile ago that one of Bezos’s only regrets is that he couldn’t have built out a more complete logistics network. We are seeing that now though, since Amazon opened up that fulfillment center in Kentucky. With that said, JD.com has a real advantage in the long term. And it’s a real long term play. They will continue to ramp up spending to further entrench themselves but eventually they will be able to regulate the supply chain from order to front door.

Best,

XMFish

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Hi Wouter

JD I’m sure is a good operation. It is growing fast and has great alliances. It will probably be a good investment.

However:

  1. JD is nowhere and is not intending to be anywhere outside of China or outside of core commerce - it is never going to take over the world (Amazon and/or Ali Baba just might)
  2. JD is not profitable so I would not look at comparing JD and Ali Baba on P/S alone and certainly not conclude that it looks relatively cheap vs BABA
  3. Potentially another way to play the JD opportunity is to invest in Tencent which looks the best of the lot from an ambition (beyond e-commerce and just China), an asset play (WeChat) and reputation (clean and admired)

Ant
ps I’m invested in BABA (in the US) and Tencent (in HK)

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Thanks for the feedback. Yes, it seems you can’t compare the valuation of BABA and JD based on sales given there different models and margins made on revenue. I don’t think that JD is a turnaround play given that revenue was up 44%. They are just investing all their profits back into the business. Just going through the news articles for the last couple of months, there are several announcements of partnerships and new ventures, so they seem to be making a lot of bets with the hope of future returns. Some of these announcements include:

These are just the announcements since August, so the company has been really busy. I wonder if they are trying to do too much. I even see they are planning on opening 10,000 brick-and-mortar stores this year, which seems odd given their focus on eCommerce:

https://seekingalpha.com/article/4102553-growth-accelerates-…

JD.com, which accounts for 62% of China’s online home appliance sales, plans to expand its offline presence by opening 10,000 brick-and-mortar stores this year, according to Vice President Yan Xiaobing. JD.com, China’s second-largest e-commerce platform after Alibaba Group, is counting on the new physical stores to expand into the home appliance market in rural areas, targeting populous counties and townships, Yan said Tuesday.

The partnerships to funnel potential buyers do seem to be helping given the quote above that some 25-35% of new users per quarter come from the Tencent partnership.

Thanks XMFish, for pointing out how well established their logistics network is. This is a wonderful asset and given the importance of 2-day delivery in the US, this seems like a competitive advantage. It sounds like they are also in the process of building out their own network in Indonesia, so the company is definitely not shy about spending money and sacrificing profits today for an even better return in the future.

XMFish, you mentioned that JD is transitioning to more of a third-party marketplace and that this segment doubled in revenue last year. Do you know how much this represents of their overall revenue? Have they talked about the impact on margins? Also, did you find this in their SEC filings or was it discussed in a press release?

I know JD is spinning off their Finance unit and I saw this comment in the following article:
https://seekingalpha.com/article/4084055-jd-com-wonderful-co…

I dug a little bit further into the JD finance spin-off. JD finance was valued at $46 billion in the last capital injection. 40% of future earning to go to JD. It’s like an indirect 40% ownership by JD or 18.4 billion worth of JD finance.

If we back out the $18B value for the 40% of future JD Finance earnings, the net valuation for the core JD business is only valued at $35B. If you consider the trailing 12 months of FCF of $4.3B (which exclude JD Finance) against the $35B, it only trades at 8 times FCF.

I understand that BABA is really profitable, but with their valuation of $459B, they are just too big for me. I’d rather invest in a smaller company that potentially has more upside. I still have more work to do to understand JD, but I will take an initial position while I research more. Thanks again for the responses.

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