The bull case for JD.com (NASDAQ:JD) is pretty simple, even with JD stock just off a 16-month low. The argument is that the market is overreacting to a series of short-term issues, and ignoring the attractiveness of the long-term business model.
Admittedly, there are a lot of short-term problems. A weakening Chinese yuan isn’t helping. Chinese stocks on the whole are in a bear market. Indeed, JD isn’t the only Chinese Internet play struggling.
But JD’s decline has been much steeper. JD has fallen 36% from its 52-week high. Among U.S.-listed Chinese stocks with a market capitalization over $10 billion, only Weibo (NASDAQ:WB) and NetEase (NASDAQ:NTES) have done worse. And in the case of JD stock, at least, the decline looks like too much.
Earnings are going in the wrong direction but JD is spending up to build a worldwide supply chain. Partnerships with significant U.S. retailers give the company much-needed wisdom and a potential foothold in Western markets. Revenue growth remains impressive, and the company has a huge runway for growth.
Admittedly, I’ve made this case for some time and the stock hasn’t performed well of late. But I still think patience will pay off – once the market looks past the short-term speed bumps.
Why JD Stock Has Struggled
It’s not terribly difficult to see why JD has pulled back over the past few months. Again, most US-listed Chinese stocks have suffered of late. Whether it’s trade war concerns or worries about the Chinese economy finally slowing down, performance has been relatively weak across the board.
And, admittedly, particularly from a short-term standpoint, JD.com hasn’t necessarily helped its own cause. Recent earnings have been somewhat mixed, including the Q2 report earlier this month.
Earnings are declining and have missed Street expectations for the past three quarters. The weakness is short-term, but as James Brumley wrote last week, investors are concerned at just how much JD.com is spending in both operating expenses and capital expenditures.
Even the fact that the decline in JD stock has outpaced that of peers isn’t necessarily surprising. It’s JD, not Alibaba, that truly is the Amazon.com (NASDAQ:AMZN) of China, as Will Healy pointed out late last year.
JD is taking ownership of its inventory (unlike Alibaba) which requires more near-term investment in the supply chain. It’s a higher-risk and higher-reward effort. And so with investors clearly focused on the risks, it’s not surprising that JD has taken a bigger beating.
The News Isn’t All Bad
But even as JD has pulled back from $50+ in February to a current $32, it’s not like the news has been all bad. Revenue growth continues to be solid, including a 31% increase in Q2. Its “logistics as a service” business grew 150% in the quarter, showing the potential value of the company’s supply chain efforts.
Short-term worries aside, the story here still is playing out. Revenue is growing online. Development of convenience and grocery stores in the country continues apace.
And three giants now are backing the company. Again, the recent weakness does make some sense. But at the same time, JD has lost about $25 billion in market value since early February without the story materially changing.
The Story Still Can Play Out
And that decline simply seems like too much. Even with near-term earnings depressed, JD stock still trades at a reasonable 34x forward earnings. Where as investors discount Amazon’s low margins as due to near-term investment, JD isn’t getting the same credit. But those investments should pay off, both in China and as the company increasingly looks to new markets.
As for Alibaba, it too might look attractive on the dip. But it also is worth about 15x JD.com and has long-running doubts about its accounting.
JD.com very well might remain number two to Alibaba in Chinese e-commerce; but number two, in that market, likely is good enough for upside.
At some point, near-term headwinds will fade and investors again will focus on the long-term promise here. When that happens, JD stock has a good chance to return to $50 and move beyond.
As of this writing, Vince Martin has no positions in any securities mentioned.
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