JD.com (NASDAQ: JD) stock is having a good year . After JD stock surged 31% so far this year, markets appear to believe that the online retailer of premium goods will report strong first-quarter results.
And after JD built an incredibly resilient logistics network in China, the company’s solid moat is sure to keep JD.com’s profit margins fairly high, providing JD stock with a positive catalyst.
Source: Daniel Cukier via Flickr
JD.com has a solid moat, thanks to its logistics network that lets the company make 90% of its deliveries in China within 24 hours. The retailer’s addressable market is not limited to China alone. It is capable of shipping 85% of its goods abroad within a day. Its delivery speed is helped by the company’s partnerships with Walmart (NYSE: WMT) and Alphabet’s (NASDAQ: GOOG,NASDAQ:GOOG) Google.
In March, JD.com said it would use Google’s e-commerce platform to sell 500 of its products. The move comes after Google invested $500 million in JD last year. If the partnership gains traction, expect the collaboration to expand, enabling JD.com’s revenues to climb even higher.
Momentum From 2018
The proportion of Chinese internet surfers who have used JD jumped from 15% to 18.4% between 2017 and 2018. The company’s net revenue grew 40% year-over-year in 2018 to $56 billion. By comparison, the revenue of online retailing giant Amazon.com (NASDAQ: AMZN) jumped 33% to $106 billion during that time. But JD stock has a market cap of $44 billion, compared to the $942 billion market cap of AMZN stock. Although Amazon.com’s EPS will grow five times faster than that of JD.com, the latter has more revenue growth potential.
JD.com’s revenue grew quickly partly because the sales of its general merchandise categories jumped more than 42% YoY. JD was successful last year because the company offered a more diversified, higher quality product selection than its competitors, along with great customer service.
In Q4, the profit margins of JD Mall and JD Logistics rose, lifting JD’s gross margin in Q4 to 14.2%, up from 13% during the same period a year earlier year. For the full year, JD’s gross margin topped 14.1%. If the company’s investments in JD Mall, which lowered its Q4 profits, pay off, the company’s gross margins likely rebounded in Q1. JD is slated to report its Q1 results on May 10.
JD increased its research and development spending by 70% year-over-year in Q4, and 80% in 2018. JD has a good track record of making its investments pay off. Consequently, the company’s recent addition of R&D staff, its investments in technology infrastructure, and its implementation of its AI-driven digital strategy are all likely to drive its revenue higher.
The Potential of JD Stock
Management said on its Q4 conference call that JD’s GMV and revenue would increase going forward, due to a favorable product mix and its investments paying off. And since its product mix will continue to be favorable, investors may be more willing to buy and hold JD stock.
Meanwhile, JD.com’s Logistics unit is still in the early phases of development. To attract major customers, it has been offering discounts. Now that the unit’s customer base is firmly in place, JD’s removal of those discounts will drive its gross margins higher, providing JD stock with an additional positive catalyst
The Valuation of JD Stock
Just how much can JD.com stock rise? The 11 analysts who have a price target on JD.com stock think it’s worth an average of $32.10, per share, according to Tipranks. That’s less than 20% above the current level of JD stock Financial models that assume revenue growth in the range of 15%-25% over the next five years produce similar price targets for JD stock.
The Bottom Line on JD
Chances are good that JD will once again issue strong Q1 results, and the company might even raise its 2019 guidance.
As of this writing, the author did not hold a position in any of the aforementioned securities.
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