Ecommerce companies have been one of the most attractive investments for quite some time. It has been a high-growth sector for almost 20 years and will continue to be on investors’ radar in the upcoming decade. In the U.S., ecommerce sales accounted for 16% of total retail sales in the June quarter and these percentages are significantly lower in emerging markets in Asia and Latin America.

We can see why investors will continue to bet on companies in the online space. Further, the COVID-19 pandemic has accelerated the shift towards online buying and may have changed consumer behavior across the globe.

Here we look at two such high-growth ecommerce companies in China to see which stock is a better buy right now.

Alibaba: A multi-billion-dollar giant

Alibaba (BABA - Get Rating) is the most diversified ecommerce company in China. It has a market cap of over $700 billion and remains one of the top bets for growth investors due to several growth drivers. During the recent Singles Day campaign that took place in China in the first 11 days of November, the gross merchandise volume (GMV) for Alibaba stood at $74 billion, up 26% year-over-year.

Further, China remains one of the fastest-growing major economies in the world. While the IMF has forecast the U.S. markets to decline by over 4% in 2020, China might grow its GDP by 1.9% in a year that is volatile, to say the least. China also has a rapidly expanding middle-class who will continue to buy products online driven by an increase in purchasing power.

In fiscal 2020, the company’s gross merchandise volume stood at $1 trillion and accounted for almost 17% of total retail sales in the country. Alibaba also ended the September quarter with 757 million annual active customers while monthly active users stood at 881 million.

Alibaba has a fast-growing digital payments vertical and is one of the largest players in the public cloud space. Its Cloud business grew sales by at least 60% in each of the last two quarters, accounting for almost 8% of total sales.

BABA stock has a forward price to sales multiple of 6.75x and a price to earnings multiple of 26x which is not too expensive for a company forecast to grow sales by 45.4% in fiscal 2021 and 31% in 2022. Analysts tracking the stock have a 12-month average target price of $338 for Alibaba, indicating an upside potential of 28% from current levels.

Note that BABA is one of the stocks in the Reitmeister Total Return portfolio. Learn more here.

Pinduoduo stock is up 450% since July 2018

Shares of another Chinese e-commerce company Pinduoduo (PDD - Get Rating) have gained 450% in just over two years, easily outpacing peers and the broader market. The stock in fact gained over 20% on November 12 after it posted stellar results for Q3.

The company’s gross merchandise volume was up 73% year-over-year at $215 billion while sales rose by 89% to $2.1 billion, above Wall Street sales estimates of $1.86 billion in Q3. PDD continues to expand its customer base as its average monthly users soared 50% to 643 million.

Yesterday, PDD reported adjusted earnings of $0.05 per share compared to a loss of $0.22 per share in the prior-year period. Earnings were also significantly higher than consensus estimates of a loss of $0.17.

Similar to other ecommerce companies, Pinduoduo has crushed the broader market and gained over 250% year-to-date. Like Alibaba, PDD will also benefit from multiple secular tailwinds allowing it to generate market-thumping returns for long-term investors.

PDD has a market cap of $161 billion indicating a forward price to sales multiple of 22x. It is trading at a much higher multiple compared to Alibaba but is also growing sales at a faster pace. Analysts tracking the stock, expect sales in 2020 to rise by 72% while its forecast to improve sales by 54% in 2021.

The verdict

Alibaba and Pinduoduo are two companies that should attract growth investors. However, Alibaba is trading at a lower valuation and is consistently profitable compared to PDD. For investors with a lower risk appetite, Alibaba is one of the top long-term bets for 2021 and beyond.

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BABA shares were trading at $258.05 per share on Friday morning, down $6.26 (-2.37%). Year-to-date, BABA has gained 21.66%, versus a 12.07% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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