With the rapid consumer sentiment shift toward online shopping, China has become the largest e-commerce market in the world, amounting to $1.543 trillion of total revenues in 2021. Notably, the Chinese e-commerce market contributed to the worldwide growth rate of 29%. In addition, the global e-commerce industry should continue to expand quickly, reaching $5.726 trillion by 2025 due to further e-commerce expansion in East and Southeast Asia.
Since the start of 2022, the e-commerce industry has entered bear market territory, as is evidenced by the ProShares Online Retail ETF (ONLN) 38.7% loss year-to-date versus the SPDR S&P 500 ETF’s (SPY) 14.32% decrease. However, the current online retail sell-off creates solid entry opportunities for contrarian investors, who are willing to add quality e-commerce stocks to their portfolios.
Keeping that in mind, I intend to analyze and compare two Chinese internet retail stocks, Alibaba Group Holding Limited (BABA) and JD.com, Inc. (JD), to determine which company is a better buy at the moment.
BABA is one of the world’s largest e-commerce companies that operates through various segments, including Core Commerce, Cloud Computing, Digital Media and Entertainment, as well as Innovation Initiatives. It also owns such well-known marketplaces as Tmall, Taobao, AliExpress, Alimama, and others. JD is one of the largest companies in the Chinese e-commerce market. It operates across three business segments: JD Retail, JD Logistics, and New Businesses.
Year-to-Date (YTD), shares of BABA have dropped about 20%, while JD has lost 15%.
Recent Developments
On March 22nd, Alibaba revealed that it had boosted its share repurchase program to $25 billion, intending to support its share price, which has plunged drastically since the ruling Communist Party tightened control over tech industries by launching regulatory crackdowns. The company said it has already paid out $9.2 billion in the previously announced buyback. Alibaba hopes that this move shows investors the company's confidence in its continued growth.
Financial Overview & Analysts' Estimates
In the third fiscal quarter of 2022, which ended December 31st, 2021, Alibaba's total revenue increased 9.7% year-over-year to RMB242.58 billion, mainly due to the revenue growth in China's commerce segment. However, the e-commerce giant failed to surpass Wall Street top-line estimates, missing by RMB3.21 billion.
The company's third-quarter non-GAAP net income stood at RMB44.62 billion, representing a 25% year-over-year decrease. However, Alibaba's Non-GAAP EPS has been reported at RMB16.87, beating analysts' consensus by RMB0.82. Notably, Alibaba’s Ecosystem continues to increase its customer base around the world, which is evidenced by a quarterly net increase of 43 million in annual active consumers to a total of 1.28 billion for the twelve months ended December 31st, 2021.
Wall Street analysts expect Alibaba's earnings to drop 31.47% YoY in the fourth quarter of 2022 to $1.10 a share. However, its revenue for the FQ4 should moderately increase by 3.89% year-over-year to $30.18 billion.
On March 10th, JD.com released earnings for the fourth quarter of 2021. In Q4, JD's overall revenue advanced 23.0% year-over-year to $43.3 billion, supported by a 22.1% YoY growth in net product revenues and a 28.3% YoY increase in net service revenues. It is important to note that JD's revenue numbers were in-line with the Wall Street estimates.
JD's fourth-quarter Non-GAAP EBITDA advanced 56.2% year-over-year to $0.7 billion in Q4, while annual active customer accounts grew by 20.7% YoY to 569.7 million in 2021. Besides, its Non-GAAP net income attributable to ordinary shareholders was RMB3.6 billion (US$0.6 billion) in Q4 versus a net income of RMB2.4 billion as of 4Q2020. With that, JD’s Non-GAAP EPADS was $0.35, topping analysts’ estimates by $0.08.
A $0.25 consensus EPS estimate for the first quarter of fiscal 2022 indicates a 34% decrease compared to a prior-year period. Although, JD's sales should grow by 12.93% YoY to $35.65 billion in 1QFY22.
Comparative Valuation
In terms of Forward P/E, JD is currently trading at 34.06x, which is higher than BABA, whose multiple is currently standing at 13.14x. However, both companies trade with a premium compared to the sector's median threshold of 12.78x.
When it comes to the Forward EV/EBITDA multiple, JD's EV/EBITDA multiple of 21.04x is about 103.5% higher than BABA's 10.34x.
Bullish Options Bets Placed On BABA Stock
The options, which expire on May 20th, 2022, saw increased call buying on April 29th. The open interest for the $95.00 calls rose by 3,726 contracts to a total of about 17,251 open contracts (source: barchart.com). A buyer of those calls would need the stock to rise to $103.25 by the expiration date, implying a gain of about 9% from BABA stock’s Thursday closing price.
The Bottom Line
While BABA and JD are well-established players in the e-commerce space, and both are expected to gain from the industry’s growth, I believe Alibaba Group is currently the better buy. BABA's buyback program aims to support its share price. Although JD’s financials look a bit better, I think BABA’s significantly cheaper valuation gives a higher margin of safety against the downside risk. Finally, some options traders bet on BABA stock, implying a bullish market sentiment from options trades.
BABA shares were trading at $90.24 per share on Friday morning, down $4.40 (-4.65%). Year-to-date, BABA has declined -24.03%, versus a -13.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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