Move aside, Alibaba. Morningstar says it prefers another Chinese e-commerce stock

Published Mon, Nov 22 202111:07 PM EST

Following Alibaba's disappointing earnings report for the September quarter, Morningstar says investors should look at another Chinese e-commerce stock instead. "Among our e-commerce coverage, we prefer JD over Alibaba as there is more clarity on the long-term margin improvement at JD versus the level of margin decline for the next few years at Alibaba," Chelsey Tam, senior equity analyst at Morningstar, said in a note on Friday. Hong Kong listed shares of JD.com popped on Monday after index provider Hang Seng's announcement Friday that JD will be included in the Hang Seng index from Dec. 6 . The Hong Kong-listed shares are up about 5% so far this year, as of Monday's close. Morningstar has a price target of 438 Hong Kong dollars per share for JD.com — a 22% upside from Monday's close. Tam cited multiple reasons for Morningstar's expectations that JD will continue to see margin improvement in the next few years. For one, JD is less aggressive than Alibaba in investing in less developed areas and serves a smaller user base that prioritizes quality over low prices, she said. "JD's customers use JD's first-party e-commerce platform for its more reliable inventory stocking, quality delivery, and authenticity of goods," Tam added. Meanwhile, Alibaba's annual active customer base in China marketplaces and new retail touched a new high of 863 million for the year ending September, she said. This makes the penetration into lower-value, less developed parts of the country a higher strategic priority for Alibaba. JD will likely be more immune to "intense competition" at the lower-margin or unprofitable lower end, while also having less overlap with rivals like Pinduoduo , a company whose growth came from smaller Chinese cities , Morningstar explained. Furthermore, JD is also seeing faster growth in the higher-margin third-party businesses at a time when Alibaba has increased lower-margin direct sales, the analyst said. "The higher certainty about positive margin and absolute profit growth trends at JD leads to it being our preferred pick versus Alibaba in the next few years," Tam said. Morningstar has a price target of 182 Hong Kong dollars per share for Alibaba, or about a 33% upside from Monday's close. To be clear, Hong Kong-listed shares of Alibaba have plunged more than 12% in two days after reporting disappointing earnings .

Chinese e-commerce phone apps clockwise from top left: Alibaba Group's Taobao, Pinduoduo, Alibaba, Alibaba's Tmall, JD.com and Alibaba's secondhand market, Idle Fish.

Chan Long Hei | Bloomberg | Getty Images

Following Alibaba's disappointing earnings report for the September quarter, Morningstar says investors should look at another Chinese e-commerce stock instead.