Alibaba vs. Pinduoduo: Which Chinese Ecommerce Stock Could Generate Higher Returns?
E.-Trade in China is growing significantly with increasing internet penetration in the country. Earlier this year, a World Economic Forum cited data from. Report Statista and eMarketeraccording to which more than 50% of global internet retail sales come from Chinese e-commerce. According to eMarketer, E-commerce in China is growing faster than anywhere else in the world.
Let’s use TipRanks’ stock comparison tool to compare two Chinese e-commerce companies, Alibaba and Pinduoduo, and see how Wall Street analysts think of these stocks.
Alibaba Group Holding Ltd. is a Chinese e-commerce giant founded by Jack Ma with a market segmentation strategy with various online marketplaces serving different market segments. The company’s TaoBao is an individual and small business marketplace, while TMall is an online marketplace for premium products.
The company’s Ali Express caters to global customers who can buy directly from manufacturers and distributors based not only in China but internationally, while Freshippo is the company’s food retail chain.
Alibaba also operates a logistics network, Cainiao Network, and has a cloud services business in China. The company also launched a platform for local services and on-demand food delivery in China after acquiring Ele.me in 2018.
For the fourth fiscal quarter, BABA posted sales of 187.4 billion yuan, up 64% over the previous year, beating consensus estimates of 179.9 billion yuan. However, the company posted an operating loss of 7.7 billion yuan, the first quarterly loss as a publicly traded company since it went public in 2014.
A major reason for the loss was an 18.2 billion yuan antitrust fine imposed on the company by Chinese regulators in April. Without the fine, it would have posted an operating profit of 10.6 billion yuan.
According to the results, Robert W. Baird analyst Colin Sebastian reiterated a buy but lowered the price target from $ 285 to $ 270 on the stock, up 26.6%. Sebastian said in a statement to investors: “Our price target of US $ 270 is achieved through a combination of our multi-year DCF and a 20-fold EV / EBITDA multiple for fiscal 23E in line with market benchmarks of 10-30x given the lack of Transparency in relation to specific aspects supported. regulatory concerns. “
“We find that Alibaba’s revenue growth rate, marketplace model with a strong margin profile, and increasingly diversified business portfolio remain key drivers for longer-term expansion,” added Sebastian.
In FY22, Alibaba plans to increase investments in strategic core areas, including helping merchants lower their operating costs, attracting new users, technological innovation, strengthening supply chain capacities, infrastructure development and expanding geographic coverage in China.
The company expects FY22 sales of 930 billion yuan, up nearly 30% year over year.
Sebastian commented on the ramp-up of investments: “In particular, we have noticed that internal (organic) innovations and strategic investments are further broadening the sales mix and investment profile.”
Alibaba had around 891 million active consumers in China annually at the end of March. The company aims to grow its Chinese customers to over 1 billion in FY22.
Sebastian stated, “From a long-term growth perspective, we expect significant sustained potential growth tailwind from growth in Internet and cellular penetration across China, which currently accounts for about half of the population (up from 80% in most developed countries). despite short-term macroeconomic headwinds. “
BABA wants to reach consumers in rural and underdeveloped areas in China through Taobao Deals and increase its investments in the app. Taobao Deals offers good value products for budget conscious consumers. The popularity of the Taobao Deals app has resulted in the average spend on Taobao Deals growing faster than the general Chinese retail market. (See Alibaba Group Holding stock analysis on TipRanks)
Sebastian believes that BABA is experiencing strong organic growth and says, “Tmall’s largest upstream source of traffic is the Taobao marketplace, which generates approximately 7% of all unique visits. We believe this will create an environment where vendors and customers actively participate across platforms and cement Alibaba’s value proposition for both buyers and sellers. “
Second, like all successful online platform companies, Alibaba’s sites do not depend on outside search engine traffic for growth, the analyst added.
The analyst also believes that BABA’s logistics network, Cainiao Network, gives the company “a significant competitive advantage over many other e-commerce players as it can process over 30 million parcels a day and monitor shipments of over five billion “. Parcels (54% of the total) in 600 cities last year with an average delivery time of around three days. “
The consensus among analysts on Wall Street is a strong buy based on 25 buy and 1 hold. The average BABA analyst target price of USD 301.60 implies an upside potential of about 41.4% to the current level.
Founded in 2015, Pinduoduo is an online marketplace that connects customers directly with retailers. The company offers a range of products on its platform, including clothing, shoes, bags, maternity and child care products, food and beverages, fresh produce, electronic devices, and other items.
The company conducts its business primarily through its mobile platform. This platform offers two purchase options, including “individual purchase” and “team purchase”.
With the “stand-alone” option, only one person places an order or transacts with the retailer, while with the “team buy” option, two or more buyers come together to buy a particular item in bulk at a lower price.
Pinduoduo has also integrated its platform with major Chinese social networks such as Weixin and QQ. Late last month, the company announced that its next-day grocery pick-up service, Duo Duo Grocery (or Duoduo Maicai), is seeing strong consumer demand. The company launched this service in August last year.
For the first quarter, the company reported total sales of RMB22,167.1 million, an increase of 239% over the previous year. The company’s average monthly active users (MAUs) for the first quarter were 724.6 million, up 49% year over year, while the number of active buyers for the twelve month ended March 31 was 823.8 million. The number of active buyers increased 31% year over year in the first quarter. (See Pinduoduo stock analysis on TipRanks)
After the first quarter results, Oppenheimer analyst Bo Pei reiterated a buy, but lowered the price target from USD 200 to USD 180 (43.4% up) “mainly due to lower peer ratings”.
Commenting on the surge in active buyers and the fact that PDD did not disclose gross value in the first quarter, Pei commented in a research note to investors: [gross merchandise value] this quarter. Assuming a similar take rate to previous quarters, GMV appears to be below consensus, which may worry some investors. Total buyers of 824 million were 1% / 2% above Opco / Street forecasts. “
PDD recorded transaction service income of RMB 2,931.5 million for the first quarter, an increase of 180% over the previous year. Bo Pei commented on the growth in transaction revenues: “Transaction revenues + 180%, mainly driven by the rapid growth of Duoduo Maicai (+ 450% q / q, according to Opco’s estimate). 1P merchandise sales remained relatively flat, contributing around 1% to total GMV, and are not a strategic focus of the company. “
Pei explained the reasons for the buy rating of the Pinduoduo share: “The profitability of the core marketplace (excluding 1P and Duoduo Maicai) corresponded to that of the previous quarters (probably not GAAP profitable).”
“The active buyers of PDD have surpassed those of BABA and JD. Duoduo Maicai is also tapping into a RMB 10T e-food market and seeing positive results, “added Pei, comparing Pinduoduo to retailers Alibaba and JD.com.
The consensus among analysts on Wall Street is a moderate buy based on 6 buys and 6 holds. The average PDD analyst target price of USD 164.61 implies an upside potential of about 31.1% to the current level.
Analysts are cautiously bullish on PDD as the company continues to expand rapidly in China. You are optimistic about BABA when you consider that the company wants to strategically expand its investments and has a diversified business portfolio.
Given the upside potential over the next 12 months, BABA seems like a better buy.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be construed as an invitation to buy or sell any security.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.