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.