JD.com is Still a Better Pick Than Alibaba Stock

Alibaba's China retail business is slowing and it will likely be hit hard by the coronavirus

Chinese e-commerce giant Alibaba (NYSE:BABA) reported strong fourth-quarter results on Feb. 13, The conglomerate’s top and bottom lines came in above analysts’ average estimates, and its revenue soared an impressive 38% year over year.

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Moreover, research firm Baird hiked its price target on Alibaba stock to $230 from $200 in the wake of the results and kept an Outperform rating on the name.

JD Can Withstand Coronavirus More Effectively Than Alibaba

During its earnings conference call on Feb. 12, Alibaba warned that it was being hurt by the failure of logistics companies’ employees to report to work due to the outbreak of the coronavirus from China. Logistics companies have failed to fully resume their operations and “a significant number of packages were not able to be delivered on time,” Alibaba CEO Daniel Zhang reported.

But unlike Alibaba, competing Chinese e-commerce company JD.com (NASDAQ:JD) does not rely on outside logistics companies to deliver its packages. Instead, it owns a complete logistics company, JD Logistics. With JD Logistics of course prioritizing the deliveries of JD’s orders, I think that a much higher percentage of JD’s orders will be delivered within a reasonable time than those of Alibaba.

Meanwhile, JD is using drones and robots to deliver products to areas that have been hit hard by the new virus. I did not see any evidence suggesting that Alibaba has been able to adopt a similar strategy. Given these dynamics, I’m convinced that JD’s results will be much less affected by the new virus than those of Alibaba.

Some of Alibaba’s Top Growth Drivers Are Still Losing Money

For several years, the revenue of Alibaba’s cloud business has been very impressive. Last quarter was no exception, as its cloud revenue jumped 62% YoY, reaching $1.54 billion. But the business continued to lose money. Even its EBITDA, excluding multiple items, came in at a loss of $51 million last quarter.

It’s frustrating that, despite the unit’s high revenue growth over at least four or five years, it’s still not profitable.

Moreover, the conglomerate’s revenue from the cloud only amounted to 7% of its total top line in Q4.  So even if the unit does generate positive profit margins of around 5%, its profits are not going to move the needle for Alibaba stock.

Similarly, the company’s digital media and entertainment businesses constituted only 7% of its revenue, and their EBITDA, excluding certain items, was a loss of $474 million.

Alibaba’s Overall China Retail Growth Is Slowing

In Q4, before the outbreak, the revenue of Alibaba’s China retail commerce business rose 36% YoY.  That growth rate was down meaningfully from 40% YoY in Q3. Conversely, JD’s retail unit grew 27.3% in Q3, up significantly from 20% YoY growth in Q2.

Meanwhile, Alibaba said that it was exploiting the rapid growth of e-commerce in China’s less developed areas by reporting that 60% of its new customers came from such regions. But those new customers from less developed areas are probably not going to move the needle much for Alibaba or Alibaba stock because there were only about 11 million of them.

Even if each one ordered $300 of products from Alibaba per year, that would only increase its revenue by $3.3 billion, while the annual run rate of the company’s Q4 revenue was $92.8 billion. Conversely, JD has been concentrating a large amount of its energy on adding new customers in China’s less-developed cities, and that strategy appears to be causing its retail business to accelerate.

The Bottom Line on Alibaba Stock

Alibaba is growing rapidly, and its shares are likely to continue to advance meaningfully by the end of the year.

But it sounds like its business will be significantly hurt by the coronavirus this quarter. Meanwhile, its growth businesses are not profitable and won’t move the needle for the company anytime soon. Further, the growth of its China retail business is slowing.

Conversely, JD is much better positioned for the coronavirus outbreak and the growth of its China retail business is accelerating, indicating that its share of the market is rising, while its strategy is working.

Given all of these points, I recommend that investors choose JD over Alibaba at this point.

As of this writing, the author did not hold a position in any of the aforementioned securities.