E-commerce in China is growing at a substantial rate with an increase in internet penetration in the country. Earlier this year, a World Economic Forum report cited data from Statista and eMarketer, stating that more than 50% of global Internet retail sales comprised Chinese e-commerce. According to eMarketer, e-commerce in China is expanding at a faster pace than anywhere else in the world.
Using the TipRanks Stock Comparison tool, let us compare two Chinese e-commerce companies, Alibaba, and Pinduoduo, and see how Wall Street analysts feel about these stocks.
Alibaba (BABA)
Alibaba Group Holding Ltd. is a Chinese e-commerce giant, founded by Jack Ma, that follows a market segmentation strategy with various online marketplaces that cater to different market segments. The company’s TaoBao is a marketplace that targets individuals and small businesses, while TMall is an online marketplace for premium products.
The company’s Ali Express targets global customers who can buy directly from manufacturers and distributors located not only in China but also internationally, while Freshippo is the company’s grocery retail chain.
Alibaba also operates a logistics network, Cainiao Network, and has a cloud services business in China. The company has also started a local services and on-demand food delivery platform in China after it acquired Ele.me in 2018.
In the fiscal fourth quarter, BABA posted revenues of 187.4 billion yuan, a jump of 64% year-over-year, topping consensus estimates of 179.9 billion yuan. However, the company reported an operating loss of 7.7 billion yuan, its first quarterly loss as a public company since its IPO in 2014.
A major reason for this loss was an antitrust fine of 18.2 billion yuan that Chinese regulators slapped on the company in April. Excluding the fine, it would have reported an operating profit of 10.6 billion yuan.
Following the results, Robert W. Baird analyst Colin Sebastian reiterated a Buy but lowered the price target from $285 to $270 on the stock with a 26.6% upside. Sebastian said in a note to investors, “Our $270 price target is supported by a combination of our multi-year DCF as well as a 20x FY23E EV/EBITDA multiple, in line with marketplace comparables 10-30x given the lack of visibility around specific regulatory concerns.”
“We note Alibaba's revenue growth rate, marketplace model with strong margin profile, and increasingly diversified business portfolio remain key drivers of longer-term expansion,” Sebastian added.
In FY22, Alibaba plans to increase investment in core strategic areas, including assistance to merchants in reducing their operating costs, acquisition of new users, technology innovation, strengthening of supply chain capabilities, infrastructure development, and expansion of geographic coverage in China.
It anticipates revenues in FY22 of 930 billion yuan, indicating nearly 30% growth year-over-year.
Sebastian commented on the ramp-up in investments, “In particular, we note internal (organic) innovations as well as strategic investments continue to broaden the revenue mix and investment profile.”
Alibaba had annual active consumers of around 891 million in China by the end of March. The company is targeting growing its Chinese customers to over 1 billion in FY22.
Sebastian stated, “From a secular growth standpoint, we expect significant ongoing potential growth tailwinds from the growth of Internet and mobile penetration across China, which stand to-date at roughly half the population (vs. 80%+ in most developed markets), despite near-term macro headwinds.”
BABA is looking to reach out to consumers in rural and under-developed areas in China via Taobao Deals, and aims to strengthen its investment in the app. Taobao Deals offers value-for-money products for price-conscious consumers. The popularity of the Taobao Deals app has resulted in average spending increasing more on Taobao Deals than in the general Chinese retail marketplace. (See Alibaba Group Holding stock analysis on TipRanks)
Sebastian believes that BABA is exhibiting strong organic growth, saying, “In fact, Tmall’s largest upstream source of traffic is the Taobao marketplace, driving approximately 7% of total unique visits. We believe this creates an environment where vendors and customers actively participate across platforms, cementing Alibaba’s value proposition to both buyers and sellers.”
“Secondarily, and like all successful online platform companies, Alibaba’s sites are not dependent on external search engine traffic for growth,” the analyst added.
The analyst is also of the opinion that BABA’s logistics network, Cainiao Network, gives the company a “meaningful competitive advantage over many other e-commerce players, with the ability to process over 30 million packages per day, overseeing the shipment of over five billion packages (54% of total) in 600 cities last year with an approximate three-day average delivery time.”
Consensus among analysts on Wall Street is a Strong Buy based on 25 Buys and 1 Hold. The BABA average analyst price target of $301.60 implies approximately 41.4% upside potential to current levels.
Pinduoduo (PDD)
Pinduoduo was founded in 2015 and is an online marketplace that connects customers directly with merchants. The company offers an array of products on its platform, including apparel, shoes, bags, mother and childcare products, food and beverage, fresh produce, electronic appliances and other items.
The company conducts its business mainly through its mobile platform. This platform offers two purchase options, including “individual purchase” and “team purchase” options.
In case of an “individual purchase” option, only one individual places an order or transacts with the merchant, while in “team purchase” option two or more buyers come together to purchase in bulk a particular item, getting a lower price in the process.
Pinduoduo has also integrated its platform with major Chinese social networks including Weixin and QQ. Late last month, the company said that its next-day pickup service for groceries, Duo Duo Grocery (or Duoduo Maicai), is seeing robust demand from consumers. The company started this service in August last year.
In the first quarter, the company reported total revenues of RMB22,167.1 million, a jump of 239% year-over-year. The company’s average monthly active users (MAUs) in Q1 were 724.6 million, up 49% year-over-year while the number of active buyers in the 12-month period ended March 31 was 823.8 million. Number of active buyers saw a rise of 31% year-over-year in Q1. (See Pinduoduo stock analysis on TipRanks)
Following the first-quarter results, Oppenheimer analyst Bo Pei reiterated a Buy but lowered the price target from $200 to $180 (43.4% upside) “primarily on lower peer valuations.”
Pei commented on the increase in active buyers and on PDD not disclosing gross merchandise value in Q1 in a research note to investors, “Consistent with its previous announcement, PDD stopped disclosing trailing-12-month GMV [gross merchandise value] this quarter. Assuming a similar take rate as the previous several quarters, GMV would seem to come in below consensus, which might worry some investors. Total buyers of 824M were 1%/2% above Opco/Street forecasts.”
PDD saw revenues from transaction services of RMB2,931.5 million in Q1, a rise of 180% year-over-year. Bo Pei commented on the growth in transaction revenues, “Transaction revenue +180%, primarily driven by the rapid growth of Duoduo Maicai (+450% q/q, per Opco's estimate). 1P merchandise sales revenue remained relatively flattish, contributing around 1% of total GMV, and is not a strategic focus of the company.”
Pei explained the rationale behind the Buy rating for the Pinduoduo stock, “Core marketplace profitability (excluding 1P and Duoduo Maicai), was consistent with previous quarters' (likely non-GAAP profitable).”
“PDD's active buyers have surpassed BABA's and JD's. Duoduo Maicai is also tapping into an RMB 10T e-grocery market and seeing positive results,” Pei added, comparing Pinduoduo to retailers Alibaba and JD.com.
Consensus among analysts on Wall Street is a Moderate Buy based on 6 Buys and 6 Holds. The PDD average analyst price target of $164.61 implies approximately 31.1% upside potential to current levels.
Bottom Line
Analysts are cautiously optimistic about PDD as the company continues to expand rapidly in China. They are bullish about BABA, considering the company is looking at ramping up its investments strategically and has a diversified business portfolio.
Considering the upside potential over the next 12 months, BABA seems to be a better Buy.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
Alibaba (BABA), through its cloud computing unit, Alibaba Cloud, plans to invest $1 billion across the Asia Pacific region over the next three years. This marks Alibaba’s largest investment allocation in the current fiscal year. The investment is intended to support talents and startups across the region.
“We are committed to bettering the region’s cloud ecosystem and enhancing its digital infrastructure,” said Alibaba Cloud Intelligence President Jeff Zhang.
Alibaba Cloud officially launched its third data center in Indonesia. It plans to launch its first data center in the Philippines by the end of 2021 and set up an innovation center in Malaysia.
Alibaba’s cloud unit serves customers globally. It ranked first in Asia Pacific and third worldwide in the global Infrastructure-as-a-Service market, according to an April report by Gartner. Alibaba Cloud became profitable during the December quarter. Its revenue grew 37% year-over-year to about $2.56 billion during the March 2021 quarter. (See Alibaba stock analysis on TipRanks)
The cloud unit secured a worldwide partnership with the International Olympic Committee until 2028. It is helping with digital solutions to make the Tokyo Olympic games coming later this year widely accessible during the pandemic.
Susquehanna analyst Shyam Patil recently reiterated a Buy rating on Alibaba stock with a price target of $350. Patil’s price target implies 62.17% upside potential. The analyst noted that despite regulatory concerns, Alibaba still has a large growth opportunity ahead and recent results showed sustainable execution.
Consensus among analysts is a Strong Buy based on 25 Buys and 1 Hold. The average analyst price target of $301.60 implies 39.75% upside potential to current levels.
BABA scores a “Perfect 10” on TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.
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Chinese stocks are out of favor right now. Investors in JD.com (JD), a Chinese online retail company, certainly know the feeling of buying into what feels like a "wall of selling" on a daily basis.
There are well-founded reasons for worry about Chinese stocks. Among the biggest risk to owning U.S.-listed Chinese stocks like JD is the threat of delisting, which has been brought about by the Biden Administration.
President Biden recently signed into law a Trump-era piece of legislation that requires Chinese firms to open their books to U.S. regulators. Citing national security law, China has refused to let U.S. regulators inspect the books of Chinese companies.
This has led to an immense amount of speculation that giants like JD could potentially be delisted from U.S. exchanges. Investors have increasingly priced this risk into even the best Chinese stocks. In many cases, large institutional investors don’t like the risk-reward profile of stocks like JD in this environment.
Given the shaky status of U.S.-China relations, it’s understandable that there will be political posturing for some time. However, the fact that Biden hasn’t backtracked this piece of Trump-era legislation is telling: the U.S. government seems to have little appetite for appeasing the Chinese.
In this light, it can be hard to understand why JD is a good investment right now. Indeed, the potential delisting poses a massive risk, and it’s enough to keep some investors up at night. (See JD.com stock analysis on TipRanks)
On the other hand, many investors may be correct in taking a bullish stance on JD right now.
Post-Pandemic Environment Should Be Welcomed By Investors
Aside from the aforementioned political risks, investors are concerned about the potential for slowing e-commerce growth in the post-pandemic world. In North America and Europe, such a view makes sense. People have been rushing to the malls like never before. At least, that’s what the stock prices of retail stocks look like right now.
However, in China, it’s a bit of a different game. The Chinese have aggressively adopted e-commerce platforms to an extent that American and European residents have not. Before the pandemic, China already accounted for 45% of global e-commerce sales. If anything, the pandemic only accelerated a trend that was on hyper-drive.
This phenomenon results from a variety of factors, but leads investors to an interesting line of thinking: perhaps e-commerce growth won’t slow as a result of the reopening. Instead, perhaps growth could actually accelerate as the economy heats up.
JD’s position as a fast-growth company shouldn’t be discounted. It’s a company competing with larger behemoths like Alibaba (BABA), but it is still gaining market share in a sector that’s absolutely exploding with growth right now.
In other words, JD is a faster-growing e-commerce play than most American companies, in a country with a growth rate well in excess of the U.S. It’s like Amazon (AMZN) on steroids (or Amazon Jr. if you think Alibaba is Amazon).
What Analysts Are Saying About JD Stock
According to TipRanks’ analyst rating consensus, JD stock comes in as a Strong Buy. Out of 17 analyst ratings, there are 15 Buy recommendations and 2 Hold recommendations.
As for price targets, the JD average analyst price target is $102.24. Analyst price targets range from a low of $80.00 per share to a high of $119.00 per share.
Bottom Line
JD’s growth rate shows just how cheaply valued this stock is relative to other high-growth plays. A 30% CAGR is certainly nothing to sneeze at.
However, the fact JD trades at roughly 20-times forward cash flows deserves consideration. Investors simply can’t find this kind of growth anywhere at this valuation. It’s among the highest-quality growth stocks in the market trading at this kind of a discount.
Risks certainly do exist in owning JD, especially relative to its American or European peers. However, there’s reason to believe this risks are more than priced in right now. At the valuation JD trades at, this stock provides investors with about as wide a margin of safety as one could ever hope for.
This is a stock investors could get excited about.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.