For much of the summer, JD.com Inc (ADR) (NASDAQ:JD) stock was hitting resistance. Yet then again, JD.com stock’s year-to-date return is still quite robust, coming to about 53%. In fact, this performance has handily beat out Amazon.com, Inc. (NASDAQ:AMZN), which is up 30% for the year.
Source: Daniel Cukier via Flickr
It’s likely that some of the recent weakness is due to profit taking, although, there are some other factors at work, too. The e-commerce market in China is fiercely competitive, and yes, there is always uncertainty regarding governmental policies.
For example, the Chinese government recently imposed a clampdown on political speech on digital platforms. According to InvestorPlace.com’s Lawrence Meyers: “China is opaque. It’s a black box.”
All these are legitimate issues, and they will continue to lead to volatility for the JD stock price.
Yet for those investors that want exposure to foreign markets, which offer strong growth opportunities, then JD.com is still a pretty good option. And to see why, let’s look at three factors that should bolster the JD stock price.
Advantage #1 for JD.com Stock: Secular Growth Trends
The fundamentals of the Chinese market are very attractive and should help provide lots of momentum for JD.com stock.
Here are just a few of the metrics to keep in mind:
- China’s annual retail sales are close to $5 trillion.
- Goldman Sachs Group Inc (NYSE:GS) projects that online sales in China will go from $750 billion in 2016 to $1.7 trillion by 2020. During this period, the online penetration is expected to jump from 16% to 22%-25%.
- China’s working population is a whopping 770 million, compared to only 146 million in the U.S.
No doubt, this is quite the backdrop for JD.com stock.
Advantage #2 for JD.com Stock: Infrastructure
Over the years, JD.com has invested heavily in its infrastructure. The company currently operates 335 warehouses that have a gross floor area of about 7.1 million square meters. JD.com has also built its own delivery service (with over 7,000 delivery stations), which even includes an extensive fleet of drones. The result is that the company has a strong footprint in urban areas but also hard-to-reach rural communities.
As seen in with the success of AMZN, customers want quality service, which means access to huge numbers of goods and receiving fast shipments.
Rival Alibaba Group Holding Ltd (NYSE:BABA) understands this as well and has been scrambling to catch up. But replicating the JD.com infrastructure will be far from easy.
Advantage #3 for JD.com Stock: Growth
Even though JD.com is nearly 20 years old, the company still looks like a scrappy startup. During the latest quarter, revenues jumped 42% to $13.75 billion, and active customer accounts rose by 37% to 258.3 million. Even though the company continues to post losses, the cash flows are still substantial. For the past 12 months, they have come to over $3 billion.
A key to the strategy is to leverage its platform with partnerships. To this end, JD.com has entered arrangements to offer goods from top brands like Casio, Juicy Couture, Armani and Essilor. As a result, the company has been able to broaden its appeal but also avoid the issues with counterfeiting.
What’s more, JD has been smart to form strategic alliances with mega tech operators, such as Baidu Inc (ADR)(NASDAQ:BIDU) and Tencent Holdings Ltd (OTCMKTS:TCEHY). These deals have provided access to large user bases as well as to cutting-edge technologies, such as AI (artificial intelligence) systems. All in all, such efforts will be critical in helping to keep up JD.com stock’s momentum.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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