JD.com Stock Gives Every Indication Of Being Significantly Overvalued
- By GF Value
The stock of JD.com (NAS:JD, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $82.07 per share and the market cap of $127.4 billion, JD.com stock is estimated to be significantly overvalued. GF Value for JD.com is shown in the chart below.
Because JD.com is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 24.8% over the past three years and is estimated to grow 23.34% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. JD.com has a cash-to-debt ratio of 4.65, which is better than 82% of the companies in the industry of Retail - Cyclical. GuruFocus ranks the overall financial strength of JD.com at 7 out of 10, which indicates that the financial strength of JD.com is fair. This is the debt and cash of JD.com over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. JD.com has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $109.1 billion and earnings of $4.591 a share. Its operating margin is 1.40%, which ranks in the middle range of the companies in the industry of Retail - Cyclical. Overall, the profitability of JD.com is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of JD.com over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of JD.com is 24.8%, which ranks better than 93% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth is 110.2%, which ranks better than 98% of the companies in the industry of Retail - Cyclical.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, JD.com's ROIC was 5.52, while its WACC came in at 6.35. The historical ROIC vs WACC comparison of JD.com is shown below:
To conclude, The stock of JD.com (NAS:JD, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 98% of the companies in the industry of Retail - Cyclical. To learn more about JD.com stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
