Shares of JD.com (NASDAQ:JD) soared on Tuesday. JD stock gained nearly 13% after its second-quarter earnings came in well ahead of analysts’ average expectations.
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And there’s a simple reason why JD.com stock can keep climbing. Specifically, even after those gains, JD.com is up only 2% over the past month. That’s because JD stock dropped 17% in five sessions a couple of weeks ago on fears of an escalating trade war, and Tuesday’s gains only recaptured most of those losses.
In other words, the good news from JD’s earnings doesn’t seem priced in. And that, in turn, suggests that JD could keep moving higher, as long as the company gets a little bit of outside help.
JD.com Crushes Estimates
Compared with analysts’ average expectations, JD.com had a truly impressive quarter. Its earnings per share of 33 cents, excluding certain items, was 25 cents above the average estimate. That was the company’s biggest earnings beat since its 2014 IPO. JD’s year-over-year revenue growth of almost 23% was more than five percentage points better than the Street’s average expectation.
On an absolute basis, too, the results looked strong. The 22.9% increase in its sales was a notable acceleration from the 13% growth that JD.com reported in Q1. And its net income, excluding certain items, increased more than 600% year-over-year.
And it’s how JD grew its sales and profits, not just by how much they increased, that helps the bull case on JD stock. When JD.com sold off last year, worries about a potential trade war and its impact on the Chinese economy were key drivers of the decline . But investors also fretted about the company’s higher spending, which pushed profits to nearly zero in Q2 of 2018.
In Q2 of this year, however, JD managed to drive strong growth while posting a modest increase in gross margin and, more importantly, controlling its operating expenses. Its fulfillment expenses only rose at half the rate of its revenue. Furthermore, its marketing spending increased less than 7%, and its general and administrative spending increased only 5%. JD.com’s spending on technology jumped 34% year-over-year, but that line item amounted to less than 2.5% of its revenue.
That focus on cost control is much-needed, and not just for JD.com. NetEase (NASDAQ:NTES) stock rallied after its Q2 results showed that its cost leverage had driven solid profit growth. Investors have wanted Chinese stocks to start showing some margin improvement, and NTES and JD.com both delivered.
JD.com’s Q2 results showed that the company is moving in the right direction. And so it’s a little surprising that JD stock has not responded more favorably to the results.
Why JD Stock Should Keep Moving Higher
It seems that JD.com stock can — and maybe should — move even higher. Again, the stock trades below where it did on July 30, before JD.com posted a blowout quarter and the U.S. decided to postpone additional tariffs. At this point, the outlook of JD stock seems to be stronger than it was two weeks ago, and yet JD stock is cheaper than it was then.
And JD.com is getting close to cheap or at least, it’s not quite that expensive. Heading into Q2, analysts’ average 2019 EPS estimate for the full year was 68 cents. JD.com now has generated 66 cents in non-GAAP EPS in just the first two quarters of the year.
JD can generate EPS of over $1 in 2019, which would put its price-earnings multiple below 30. In 2o20, that multiple could drop to the low- to mid-twenties.
That multiple isn’t necessarily that cheap in the context of Chinese stocks right now. Rival Alibaba (NYSE:BABA) trades at less than 20 times the average fiscal 2021 EPS estimate. Internet plays Baidu (NASDAQ:BIDU) and Weibo (NASDAQ:WB) are even cheaper.
But JD.com’s thin margins, still only 2%+ in Q2, still have much more room to increase. And thus there’s more room for the company’s profit to grow, making a higher multiple justified.
JD does pose some risks. JD.com hasn’t always been the most consistent performer. Sentiment toward Chinese stocks on the whole still looks shaky — and that goes double for Chinese tech, as I wrote last month. As a result, in the near-term, JD stock might be choppy.
Still, for Chinese bulls, JD stock looks awfully attractive. And there appears to be room and reason for its post-earnings gains to continue.
As of this writing, Vince Martin did not hold any of the aforementioned securities.
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