The last few years have been challenging for Chinese companies, whose stock prices fell despite the indexes hitting new highs.
Investors, in general, have concerns about the ongoing political tension between the U.S. and China and the lack of clarity on China's long-term development trajectory in the coming years. Naturally, they avoid Chinese companies.
However, such a pessimistic attitude toward these companies captures the interest of contrarian investors. To them, plenty of well-established Chinese companies are worth owning for the long term, such as Baidu(NASDAQ: BIDU) and JD.com(NASDAQ: JD).
This article will explore which of these two companies is a better buy now.
Image source: Getty Images.
Understanding Baidu and JD's business models
Baidu and JD.com are the earlier generations of tech companies in China that have survived and thrived despite the competitive tech landscape. Both companies evolved from their initial business -- Baidu in search engine and JD.com in e-commerce -- to become the tech conglomerate they are today. But beyond these similarities, both companies have vastly different business models.
Baidu, often known as the Google of China, is the leading search engine in China. With its vast user base of 703 million, the tech company is indispensable to Chinese consumers and advertisers. Consumers rely on Baidu for information, while advertisers leverage the tech company's platform and huge user base to provide targeted advertising.
Beyond its core search engine business, Baidu is also one of the leading players in the artificial intelligence (AI) cloud computing industry, a majority owner of iQIYI (also known as the Netflix of China), and an early mover in the autonomous driving industry. Over the years, the company has reinvested the profits from its core search engine business into these newer businesses as it diversifies revenue sources.
While Baidu focuses mainly on selling intangible products and services, JD has generally been the opposite. Also known as Amazon of China, JD operates a massive first- and third-party e-commerce marketplace in China that focuses on selling goods to consumers at attractive prices. Its first-party business buys goods directly from suppliers before reselling them to consumers for a profit. In contrast, its third-party business allows external merchants to sell on its platform in exchange for a fee.
Like Amazon, JD has invested heavily in infrastructure, covering every aspect of the logistics network from warehousing to last-mile delivery. While these investments keep customers happy with fast and reliable delivery, they are extremely costly to build and maintain, which eats into JD's already low margins as a retailer. Baidu, on the other hand, operates an asset-light business model with high margins.
Perhaps acknowledging the shortcomings of its original business, JD has, in recent years, expanded into other asset-light businesses such as healthcare, fintech, and asset management. This diversification offers a more balanced revenue profile by adding higher-margin service revenue to complement its e-commerce income.
Opportunities and risks
The vast differences in business models mean that the prospects of Baidu and JD will depend on different factors.
Let's begin with Baidu. As an early mover and investor in artificial intelligence (AI), Baidu's future growth depends on the development of the AI industry in China and how well the company can execute to capture this opportunity. To put the potential into perspective, Statista estimates that the Chinese AI market will reach $155 billion in 2030. Just capturing 5% of this market opportunity will be huge for the tech company.
Similarly, Baidu's autonomous ride-hailing service has bright prospects. It has been in operation for a while, providing more than 7 million cumulative rides to the public.
The downside, however, is that Baidu recently faced difficulties in growing its core search engine business. For perspective, its online marketing revenue fell 2% in the second quarter of 2024. While it's too early to decide whether the recent poor performance is temporary or structural, investors should closely monitor the development of this business.
Like Baidu, JD is facing challenges in growing its core e-commerce business lately as competition intensifies. Net product revenue came in flat in the second quarter of 2024 on the back of weak electronics and home appliance sales, offset by strong general merchandise growth. However, as the company diversified into other services, the weakness in product sales was partially mitigated by an increase in service income.
In the future, JD's growth will depend on how well it competes against its e-commerce peers Alibaba and Pinduoduo, and the performance of its younger ventures like JD Logistics and JD Healthcare. JD could also benefit from the growth in AI -- it has its own cloud computing business -- so investors can also keep an eye on this area.
Which stock is a better buy?
It depends.
Both stocks are cheap since investors have generally avoided Chinese companies due to macro-level risks, including geopolitical tension plus political and regulatory uncertainties. Buying either of them will require investors to accept these risks.
On the other hand, both companies have vastly different business models and operate in different segments. Investors should, therefore, consider their circle of competence when deciding which company is a better option for them.
That could also mean rejecting either of them, especially if investors find them too hard to understand, the risk too much to accept, or both.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has positions in Alibaba Group and PDD Holdings. The Motley Fool has positions in and recommends Amazon, Baidu, JD.com, and Netflix. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
