Better buy: Baidu or JD.com stocks

The last few years have been challenging for Chinese companies, with share prices falling even as indexes reached new highs.

Investors, in general, are concerned about the ongoing political tensions between the U.S. and China and the lack of clarity about China’s long-term trajectory in the coming years. Naturally, they are avoiding Chinese companies.

However, such a pessimistic view of these companies is attracting the attention of investors with a different view. For them, many successful Chinese companies are worth owning in the long run, such as Baidu (BIDU 0.52%) AND JD.com (JD 0.35%).

In this article, we will check which of these two companies is better to buy right now.

Understanding Baidu and JD Business Models

Baidu and JD.com are earlier generations of technology companies in China that have survived and thrived despite a competitive technology landscape. Both companies have evolved from their initial businesses—Baidu in search and JD.com in e-commerce—into the technology conglomerates they are today. But beyond these similarities, the two companies have very different business models.

Baidu, often called the Chinese Google, is the leading search engine in China. With a massive user base of 703 million, the tech company is indispensable to Chinese consumers and advertisers. Consumers rely on Baidu for information, while advertisers use the tech company’s platform and massive user base to deliver targeted ads.

In addition to its core search engine business, Baidu is also one of the leading players in the artificial intelligence (AI) cloud computing industry, majority owner of iQIYI (also known as Netflix China) and a pioneer in the autonomous driving industry. Over the years, the company has reinvested profits from its core search engine business into these newer businesses, diversifying its revenue sources.

While Baidu focuses mainly on selling intangible products and services, JD is generally the opposite. Also known as Amazon China-based JD operates a massive third-party and first-party e-commerce marketplace in China that focuses on selling goods to consumers at great prices. Its first-party business buys goods directly from suppliers and then resells them to consumers for a profit. Its third-party business, on the other hand, allows third-party sellers to sell on its platform in exchange for a fee.

Like Amazon, JD has invested heavily in infrastructure, covering every aspect of its logistics network, from warehousing to last-mile delivery. While these investments satisfy customers with fast, reliable delivery, they are incredibly expensive to build and maintain, eating into JD’s already thin margins as a retailer. Baidu, on the other hand, operates a business model based on lightweight assets and high margins.

Perhaps recognizing the shortcomings of its original business, JD has expanded into other, lower-carbon businesses in recent years, such as healthcare, fintech, and asset management. This diversification offers a more balanced revenue profile by adding higher-margin services revenue to complement e-commerce revenue.

Opportunities and threats

The vast differences in their business models mean that Baidu and JD’s prospects will depend on different factors.

Let’s start with Baidu. As an early player and investor in artificial intelligence (AI), Baidu’s future growth depends on how the AI ​​industry in China develops and how well the company can capitalize on this opportunity. To put this potential in perspective, Statista estimates that the Chinese AI market will reach $155 billion by 2030. Capturing just 5% of this market opportunity would be huge for the tech company.

Similarly, Baidu’s autonomous ride-hailing service has bright prospects. It’s been operating for some time now, providing more than 7 million rides to the general public.

On the downside, Baidu has recently struggled to grow its core search engine business. In comparison, online marketing revenue fell 2% in the second quarter of 2024. While it’s too early to decide whether the recent weak performance is temporary or structural, investors should keep a close eye on how the business is developing.

Like Baidu, JD has recently faced challenges in growing its core e-commerce business as competition intensifies. Net revenue from product sales remained flat in Q2 2024 due to weak sales of electronics and home appliances, which was offset by strong growth in consumer goods sales. However, as the company diversified into other services, the weakness in product sales was partially mitigated by growth in service revenue.

JD’s future growth will depend on how well it fares against other e-commerce companies Alibaba AND Pinduoduo, and the performance of its younger ventures, such as JD Logistics and JD Healthcare. JD could also benefit from AI growth — it has its own cloud computing business — so investors could keep an eye on that area, too.

Which stocks are a better buy?

It depends.

Both stocks are cheap because investors have generally shunned Chinese companies due to macro risks, including geopolitical tensions and political and regulatory uncertainty. Buying either stock will require investors to accept those risks.

On the other hand, both companies have completely different business models and operate in different segments. Investors should therefore consider their circles of competence when deciding which company is a better option for them.

It may also mean rejecting any of them, especially if investors find them too difficult to understand, the risks are too great, or both seem unacceptable.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Nga holds positions in Alibaba Group and PDD Holdings. The Motley Fool holds positions in and recommends Amazon, Baidu, JD.com, and Netflix. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.