The bull thesis on Chinese e-commerce giant JD.Com Inc(ADR) (NASDAQ:JD) is quite simple. The China retail growth narrative remains on fire, but JD stock has been stuck in neutral. It’s up more than 50% on the year, but all those gains came in the first-half of 2017. Over the past 3 months, JD.com stock is down about 5%.
Source: Daniel Cukier via Flickr
The weakness in shares isn’t due to any operational fumbles (revenues rose nearly 40% last quarter to top expectations, while the margin expansion narrative remains on track). Nor is it due to any slowdown in the China retail growth narrative (the digital retail market in China is expected to continue to grow around 16% per year over the next several years).
JD stock is simply taking a breather after a monstrous run higher.
Meaning now is the time to accumulate shares while investor demand remains depressed. This is a multi-year growth stock that is immersed in a secular growth market and is just starting its profitability ramp. Not many other stocks out there have as robust a growth profile as JD.
Considering that robust growth profile, demand for JD.com stock won’t remain depressed for long. This stock will bounce back, as good numbers continue to roll in.
JD.Com Is in the Right Market
JD.Com is attacking the very big and growing digital retail market in China.
Thanks to a booming middle class, China’s retail market is growing at a rather robust 12% per year. Moreover, this retail growth narrative has been accompanied by urbanization and digitization narratives in China. As more and more Chinese consumers become digitally connected, more and more retail sales migrate online. Digital channel retail sales have increased from a 6.2% penetration rate in 2012 to 14% today.
This combination of growing digital market share against a booming retail backdrop has led to digital sales surging more than 40% per year over the past several years. This healthy growth is expected to continue. Digital sales growth in China into 2019 is expected to be 16% per year.
As the digital retail growth narrative in China continues to play out, JD.com will continue to post hearty growth numbers.
JD.Com Is a Winner in the Right Market
But JD’s growth numbers will be especially good given its size.
As retail markets mature, they also tend to consolidate around a few large players. Bigger players tend to squeeze out smaller players. Just look at the United States, where the top 20 retailers control 45% market share.
In China, the top 20 retailers control only 12% market share.
As the Chinese retail landscape starts to look more like the American retail landscape, big retailers will win due to market consolidation. The best way to play the Chinese retail growth narrative, then, is to invest in the biggest Chinese retailer.
Who might that be? JD.Com.
At $37 billion in revenues last year, JD dwarfs other retailers in China (the next biggest retailer stands at $21 billion in revenues). Perhaps not so coincidentally, JD is also the fastest growing notable retailer in China (revenue growth of over 40% last year far outpaced peer growth rates).
That growth isn’t slowing by much. Revenue growth continues to hover around 40% and is expected to be 30% next year. Meanwhile, margin expansion is expected to drive huge earnings ramp over the next several years.
All in all, it feels like now is the perfect time to buy into this growth narrative.
Bottom Line on JD Stock
JD stock is taking a breather after a monstrous run higher, but this secular growth narrative is far from over.
As China’s retail scene continues to look more and more like America’s retail landscape, JD.com will continue to report robust growth numbers. As these strong growth numbers roll in, JD stock will grind higher.
I think now is the time buy while shares are weak.
As of this writing, Luke Lango was long JD.
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