The year 2018 has become one JD.com (NASDAQ:JD) investors would like to forget. As trade war-related concerns weighed on margins, JD stock sold off steadily throughout the year.
However, despite fears, revenue growth remains robust, and any declines in profit appear temporary. With JD.com stock trading at a substantial discount, I believe investors need to look past trade war-related noise and remain bullish on JD.
JD Stock Suffered a Painful 2018
To be sure, JD faced a rough patch this year. The U.S.-China trade war and growing evidence that China cannot continue to support its past growth rate have weighed on the equity.
This might make little sense at first glance. JD has received investments from the likes of Walmart (NYSE:WMT) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). Despite this, the company’s ties to the U.S. remain limited. However, millions of JD customers depend on U.S. trade for their source of income and that can weigh on JD’s sales.
For this reason, the trade war likely contributed to revenues missing estimates in the previous quarter. Many have also expressed concerns over falling earnings estimates. Analysts expect 2018 net income to come in at just 26 cents per share, down from 48 cents per share last year. Partially because of these numbers, JD.Com stock has fallen by more than 55% over the last 11 months.
A Bull Case Remains for JD stock
My InvestorPlace colleague Vince Martin argues that this has made the bull case tougher to defend. Admittedly, he makes some crucial points. The alarming drop in consensus 2019 earnings from 88 cents to share to 56 cents to share substantially changes the value proposition of the stock. Also, a looming recession could place further pressure on JD stock.
However, unlike Mr. Martin, I believe the current stock price reflects its challenges. Also, I think the situation facing JD calls for perspective. Despite missing estimates in the last quarterly report, revenues grew by 21% year-over-year. Moreover, despite downward revisions and a temporary decline this year, earnings will more than double in 2019 if the current estimates hold.
Investors should also remember that JD remains the second-largest ecommerce retailer in China behind Alibaba (NYSE:BABA). When Jack Welch ran GE (NYSE:GE), he invested only in businesses that ranked number one or number two in their industry. JD offers individual investors to benefit from this successful philosophy.
Also, as Mr. Martin points out, holding second place while maintaining a market cap of only $32 billion in the world’s most populous country points to tremendous growth potential.
JD.com Invests Heavily in Itself
From a retailing perspective, JD also resembles Amazon (NASDAQ:AMZN) more closely than Alibaba. JD typically owns the merchandise it sells and continues to build an Amazon-like logistics infrastructure.
This logistics spending has reduced short-term profits, contributing to a forward price-to-earnings (PE) ratio of over 39. I often urge investors to stay away from such multiples.
However, in the years to come, JD’s spending on itself should bolster future profits. For this reason, the $32 billion market cap likely serves as a more critical measure of the potential of JD.com stock.
The Bottom Line on JD Stock
In the midst of trade wars and fears of recession, prospective buyers should stay focused on the long-term potential of JD stock. Without a doubt, uncertainty and continually falling earnings estimates have weighed on JD.
However, the trade war will not last forever. Also, even if a recession hits, it should not derail China’s long-term growth. In the end, only two numbers define the future of JD.com stock.
One is $32 billion, its surprisingly small market cap. The other number is “400 million and growing,” the proportion of China’s 1.4 billion population defined as “middle class.”
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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