China-based JD.Com Inc(ADR) (NASDAQ:JD) often finds itself ignored in favor of its better-known competitor Alibaba Group Holding Ltd (NYSE:BABA). However, given the fact that JD holds its inventory, it appears to be more akin to Amazon.com, Inc. (NASDAQ:AMZN) than BABA. Most importantly, both the company and JD stock are on the rise.
And with JD’s rise, a competitive dynamic has arisen that will eclipse the battle between two well-known U.S. retail titans.
JD Stock Should Receive More Attention
My InvestorPlace colleague, Chris Lau, believes the time has come to shift attention from stories about Alibaba to JD.com news. I happen to agree with him. For one, Wall Street should regard JD, and not BABA, as the “Amazon of China.” JD owns its inventory and has built a warehouse and logistics infrastructure across China. Alibaba merely serves as a middleman.
Additionally, starting next year, consensus earnings-per-share (EPS) forecasts indicate a continuing streak of profitable quarters starting with the quarter ending in March 2018 for JD.com. While investors tend to buy a stock well ahead of this milestone, it serves as confirmation that the value proposition of JD stock remains viable.
JD Stock Has Risen More Slowly Despite Greater Company Growth
Other valuation metrics appear favorable for JD as well. The current forward price-to-earnings (PE) ratio of JD stock is higher than Alibaba (47 vs. 26). Still, JD stock trades at just over 1 times sales and about 7 1/2 times its book value. Alibaba’s trades at over 9 times book value, and its price-to-sales ratio stands at 15!
The JD stock price has increased about 65% year to date, but BABA stock has more than doubled. While both appear more favorable to Amazon’s 300 P/E ratio, JD.com stock has a much more favorable P/S ratio, along with the built-in stability of owning a logistics infrastructure and higher revenue growth. And with JD’s much lower market cap ($61 billion vs. almost $440 billion for BABA), JD stock has more room to grow.
JD partially compensates for its smaller size by forging strategic alliances. One recent bit of JD.com news involves a partnership with Chinese investment company Tencent Holdings Ltd (OTCMKTS:TCEHY). JD and Tencent together have taken a position in Chinese online clothing retailer Vipshop Holdings Ltd – ADR (NYSE:VIPS). Though Vipshop remains a competitor, a position in the company helps JD better compete with the much larger Alibaba.
JD Stock Will Profit From a Larger Middle Class
Most importantly, the story of the emerging middle class in China continues. Most of the population has moved out of poverty. However, large segments of the population will be moving from a lower- to an upper-middle-class status. The upper-middle class (defined by McKinsey and Company as $16,000-$34,000 per year in income) will grow from 14% of the population in 2012 to 54% in 2022. The cohort of lower-income Chinese (those with incomes of less than $9,000 per year) will fall from 29% to 16% in the same period. Given that China’s population is almost five times that of the United States, the cohort moving from lower-middle to upper-middle class represents nearly twice the U.S. population.
Both Alibaba and JD.com have benefitted and continue to benefit from these upward shifts in income. However, with the size advantage enjoyed by China, the battle between JD and BABA will be the Chinese equivalent of the battle between Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE:TGT).
Like Walmart in comparison to Target, Alibaba enjoys a tremendous size advantage over JD. Still, these companies have spent decades trading places in the U.S. retail environment. Often when WMT is up, TGT is down and vice versa. The same pattern appears to be forming for JD and BABA. BABA currently holds the higher position. However, JD’s move to profitability sets up JD to attain an advantage in stock growth and reputation.
Final Thoughts on JD Stock
Expect the battle between BABA stock and JD stock to grow into a larger, online version of the competitive battle between Walmart and Target. A move into profitability and a deeper infrastructure serve as enough reason to take JD seriously. Its Amazon-like structure positions JD to take on and succeed against the much larger Alibaba.
Moreover, China’s income growth, as well as the vast size difference between JD.com and BABA create substantial room for JD to grow.
Also, JD’s move into profitability catalyzes a move upward relative to Alibaba. Given all this, investors in the Chinese online retail world should sell BABA and buy JD stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.