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Forget Pinduoduo, Alibaba Is a Better E-Commerce Stock

Pinduoduo (NASDAQ: PDD) has gained a lot of attention since its IPO in mid-2018. The Chinese e-commerce platform popularized bulk "social" purchases, which allowed shoppers to team up, split bulk orders, and drive down individual unit prices.

Pinduoduo's business model quickly gained momentum in China's lower-tier cities. Pinduoduo claimed 7.3% of the country's e-commerce market last year, according to eMarketer, putting it in third place behind Alibaba (NYSE: BABA) and JD.com (NASDAQ: JD) -- which held 55.9% and 16.7% shares, respectively.

Image source: Getty Images.

Pinduoduo even surpassed JD in total shoppers (though not revenue) last year, thanks to legions of shoppers teaming up on bulk purchases. Alibaba, seemingly worried about Pinduoduo's growth, allegedly forced its merchants to stop cross-selling their products on Pinduoduo.

Those developments suggested that Pinduoduo could become a better e-commerce stock than Alibaba. However, a closer look at three of Alibaba's core strengths indicates it's still smarter to stick with the established market leader.

1. Alibaba generates consistent profits

Pinduoduo's revenue rose 91% annually to 10.79 billion yuan ($1.55 billion) last quarter, but that marked its slowest growth since its IPO. Its net loss narrowed from 2.42 billion yuan to 1.75 billion yuan ($252 million), but its cash and equivalents tumbled 59% to 5.77 billion yuan ($828 million).

Pinduoduo is burning so much cash because it's subsidizing purchases of brand-name goods. Pinduoduo was previously criticized for selling low-quality and counterfeit goods, so it courted bigger companies.

But bigger companies weren't willing to sell their products at lower prices than other marketplaces, so Pinduoduo subsidized the difference out of its own pocket. That strategy is dangerously unsustainable, especially since Alibaba is aggressively locking top merchants into exclusive deals on Tmall and Taobao.

Alibaba remains consistently profitable. Last quarter, its revenue rose 38% annually to 161.5 billion yuan ($23.2 billion) as its net profit surged 62% to 50.1 billion yuan ($7.2 billion). It generated 88% of its revenue from its core commerce business, which remains the company's only profitable business segment.

2. Alibaba has more growth engines

The profits from Alibaba's core commerce business -- which includes Taobao, Tmall, Aliexpress, Alibaba.com, Lazada, its cross-border platforms, and its brick-and-mortar stores -- feed the growth of its three other unprofitable divisions.

Image source: Getty Images.

Those three businesses -- Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives -- all expand Alibaba's digital reach. Alibaba Cloud is currently the top cloud infrastructure platform in China. The Digital Media unit expands its reach with streaming media platforms, content production, and web-based software, while its Innovation unit produces ecosystem-expanding devices like smart speakers.

That diverse ecosystem locks in customers, merchants, and enterprise customers. Pinduoduo can't boost the stickiness of its ecosystem in comparable ways.

3. Alibaba is moving into lower-tier markets

Pinduoduo enjoyed a first mover's advantage against Alibaba and JD in lower-tier markets. But Alibaba and JD are both striking back with their own discount platforms for lower-income shoppers.

Alibaba launched a flash sale platform, Juhuasuan, and a dropshipping platform called Taoxiaopu, which encourages users to sell merchants' products to their social networking contacts. Last quarter, Alibaba stated that 60% of its new customers were from less developed areas of China. JD recently launched a discount marketplace called Jingxi, and declared 70% of its new customers came from lower-tier cities last quarter.

Alibaba's advance into lower-tier cities, along with its aggressive deals with merchants, puts tremendous pressure on Pinduoduo's core business. Pinduoduo is trying to offset that slowdown by expanding into higher-tier cities, but that push requires big promotions and subsidies -- which will ultimately result in wider losses.

The key takeaways

Pinduoduo is still growing rapidly, but its losses look unsustainable. Alibaba retooled its strategy to crush Pinduoduo, and will likely force the underdog to burn through its remaining cash reserves with its ill-advised subsidies.

Alibaba isn't a perfect investment, since its core commerce business is increasingly dependent on lower-margin (cross-border and brick-and-mortar) businesses. But it's definitely a better e-commerce stock than Pinduoduo, which desperately needs to shift gears to keep pace with Alibaba and JD.

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Leo Sun owns shares of JD.com. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. and JD.com. The Motley Fool has a disclosure policy.


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