Amazon.com and JD.com are two companies very much alike. Both companies aim to control all facets of their e-commerce ecosystem, including the purchase, sale, and fulfillment of goods. The most glaring difference between the two companies is that JD.com operates in the fast-growing China market while Amazon.com is mostly in the U.S. For that reason investors might consider JD.com to be the best long-term investment of the two, but is this assumption correct?
Why JD.com has high hopes
In 2014, eMarketer estimates, Asia-Pacific will surpass North America's business-to-consumer e-commerce sales to be the largest region by sales on the globe with $525 billion versus $482 billion. Looking ahead to 2015-2017, eMarketer estimates sales will grow 43.3%, 34.4%, and 29.4% respectively, year over year in China. For the same period, the U.S. will grow at just 11.4%, 10.9%, and 10.4%, the analysts at eMarketer estiamte.
The trajectory of of each country's growth gives a far different operating outlook for Amazon.com and JD.com. In 2015, Amazon.com is expected to grow revenue 18.5% year over year to $106 billion while expectations for JD.com are higher with year-over-year growth of 48% and revenue of $27.2 billion. Because of the sales growth in China, it makes sense that investors would call JD.com the superior long-term investment of the two. However, this rationale would be faulty.
A couple of things to consider
Amazon.com is the U.S. market leader in e-commerce while JD.com's share in China stands at just 21.2% as of the second quarter, according to iResearch. Amazon.com is the cream of the crop in North America, while JD.com must contend with a dominant competitor in Alibaba, whose Tmall site controls 57% of China's online retail market. This puts JD.com at a competitive disadvantage.
Another thing to consider is profitability, or a lack thereof. Amazon.com's operating margin of 0.1% over the last 12 months is nothing to brag about, but it is far superior to JD.com's negative 5.2% operating margin over the same period. In other words, JD.com is yet to prove that it can create profits from operations.
Amazon.com has created over $1 billion of free cash flow over the last 12 months, meaning the company's operations are very profitable. Amazon.com has chosen to make big investments in video content, cloud services, grocery, etc. to diversify its business and enlarge its market-leading presence. The fact that Amazon.com has already proven that it can create profits from operations puts it on a higher pedestal than JD.com.
Let's talk about valuation
JD.com's $34 billion market capitalization is entirely tied to its e-commerce operations. Amazon.com has far more moving parts.
For example, the Amazon Web Services, or AWS, unit has a 27% share of a cloud infrastructure market with $14.5 billion in estimated sales over the last 12 months, an industry that's growing at nearly 50% annually, according to Synergy Research. With over $1 billion in quarterly revenue from AWS, according to Synergy, the segment accounts for just 5% of Amazon.com's revenue. However, with spending on cloud services and software expected to create a $190 billion market by 2020, according to Forrester Research, research firm Evercore has placed a $50 billion valuation on AWS due to its positioning in the space, and its likelihood to grow long term.
Using these numbers, one-third of Amazon's $150 billion market capitalization is tied to AWS, meaning the stock trades at about 1.2 times trailing-12-month sales minus AWS. JD.com trades at 2.1 times trailing-12-month sales, a near 100% premium to Amazon.com. This is something that must be considered when looking at these two stocks.
Something to think about
JD.com may be growing faster than Amazon.com, but that growth is more a product of location, and is quite pricey for investors to own. Furthermore, JD.com is still second in market share to Alibaba -- by a wide margin -- and is yet to prove that its business model can create profits. Not to mention, JD.com lacks a diversified business model, meaning its e-commerce business carries a much higher valuation to sales than Amazon.com.
That said, Amazon.com is attractively valued following its recent losses. Meanwhile, there are still a lot of questions surrounding JD.com, and how it can perform long-term against competitors in China. In a head-to-head comparison, Amazon.com wins as the safer long-term investment opportunity.
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The article JD.com vs. Amazon.com: Which Is the Better Bet? originally appeared on Fool.com.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
