JD.com (NASDAQ:JD), one of the largest Chinese online retailers, has rewarded its shareholders extremely well so far in 2019. Year-to-date, JD stock is up over 34%.
Source: Daniel Cukier via Flickr
Despite the overall strength of JD this year, I do not think long-term investors should rush to buy it at this point. When JD.com reports its earnings on May 10, Wall Street will be able to better gauge the financial health of the company. Furthermore, yesterday President Trump tweeted that he was prepared to impose further tariffs on China, causing the markets to tumble today. Although I would not bet against JD stock, I expect JD to undergo volatility and possibly weakness this month. Here is why I believe that:
JD Is a Growth Stock in a Dynamic E-Commerce Market
JD stock and many of the other Chinese companies listed on U.S. exchanges enable investors to benefit from growing Chinese consumer spending.
Online shopping represents about 35% of China’s total $5.5 trillion retail market,and JD.com has a 25% share of the online retail market. Inevitably, a great deal of competition has arisen in such a large market. JD’s main competitor is Alibaba (NYSE:BABA), whose Tmall and Taobao platforms are China’s largest online business-to-consumer and consumer-to-consumer marketplace, respectively.
In the past few years, new players have entered the internet commerce marketplace in China. One example is Pinduoduo (NASDAQ:PDD), a Groupon-style (NASDAQ:GRPN) retailer, which had its IPO in 2018. In addition to its online e-commerce operations, JD.com also has hundreds of warehouses and thousands of delivery stations as well as fresh food stores across China.
JD’s impressive growth has attracted the attention of U.S. tech giants, too. In June 2018, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google announced that it would invest $550 million in JD.com. Both companies stated that they would collaborate on various e-commerce and technology projects. Under the deal, Google received 27,106,948 shares of JD stock at a price that equated to $40.58 per American depository share. Although the cooperation between the two companies is likely to benefit both of them in the years to come, so far JD.com stock hasn’t reflected any benefits from the collaboration.
Although the Chinese economy may slow further in 2019 or 2020, China’s GDP is still expanding at an average annual rate of at least 6%. In other words, China’s growing middle class will continue to drive increases in the country’s consumer spending and the expansion of China’s e-commerce market. And when Chinese citizens have more money in their pockets, they can spend more money on online shopping sites like JD.com.
However, since JD stock is a growth name, it trades on forward sales as well as the momentum provided by future expectations. The markets are likely to continue to be choppy in May, especially since many other tech heavyweights and Chinese ADR’s are expected to release their quarterly reports this month.
The volatility of JD stock is high, giving it a broad trading range, so short-term traders should be cautious about buying JD in coming weeks.
JD.com Stock and Earnings Season Jitters
On Feb. 28, JD.com reported strong Q4 results, as its quarterly revenue increased by 22% year-over-year to $19.6 billion. Meanwhile, JD’s active customer base reached 305.3 million in 2018. The stock has so far responded well to the earnings report.
On May 10, in addition to the headline numbers, such as earnings and adjusted revenues, the owners of JD stock will pay particular attention to several other issues.
Recently, a U.S. college student sued Richard Liu, the founder and CEO of JD.com, over allegations that he raped her. Liu controls 80% of the voting rights of JD stock. Many analysts fear that these legal woes highlight important corporate governance issues at the company. Therefore, analysts are likely, when JD reports its results, to try to determine if the company is being adversely affected by Liu’s personal legal issues.
JD stock is momentum-driven, so it usually experiences big price swings after reporting its earnings. In other words, JD.com stock can easily gap up if its results are better than expected. Alternatively, if investors are disappointed by the numbers or by upcoming legal challenges, JD can easily tumble.
Options markets are pricing in an approximate post-earnings move of 7%-9% in either direction by JD.com stock. If the earnings report is well-received, my next price target for JD.com stock in the coming weeks would be between $31 and $34.
On the other hand, if the Street is disappointed by JD’s results, JD could easily drop towards $25.
Unless JD’s earnings and 2019 guidance are exceptional, many investors may decide to wait for a pullback of JD stock before hitting the “buy” button.
So Should You Buy JD Stock in May?
I think JD.com is still one of the best stocks China has to offer, and it could easily fit in a diversified portfolio. Within two years, I expect JD stock to easily rise to the lower $40’s which is the price that Google paid for the shares in 2018.
However, in coming weeks, I think the JD.com stock price will be volatile.
As a result of the recent impressive rise of JD stock, its short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that JD.com stock has become “overbought.” So, in the next few weeks, there might be some profit taking in JD.com stock.
After the company’s earnings results, I would not fight the tape, and I would be willing to re-evaluate the technical outlook of JD stock in the coming days.
If you already own JD stock, you might want to hold onto your shares. However, you may consider placing a stop loss at about 5%-7% below the current price point.
After the upcoming earnings call, if the price of JD drops, and you still believe in the bull case for JD.com stock, then you might consider waiting for a better time to buy, such as when the share price is around $25.
As of this writing, the author did not own shares in any of the companies mentioned.
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