China’s ecommerce powerhouse, JD.com (NASDAQ:JD), has been a magnet for controversy lately. And this has certainly had an impact on the company’s shares. From June 2018 to November, JD stock went from $43 to $19. But then there has been a powerful rally. Note that JD is now at about $30.
Source: Daniel Cukier via Flickr
No doubt, one of the reasons for the volatility has been the company’s founder and CEO, Richard Liu. About four months ago, while he was visiting Minneapolis, a student from China accused him of rape. Liu was arrested but the charges have since been dropped.
But the controversy is far from over. The student has recently filed a lawsuit against Liu. There has also emerged a protest against him, with a petition signed by hundreds of people on social media platforms like Tencent’s (OTCMKTS:TCEHY) WeChat.
It’s far from clear what will happen with the suit. Yet despite the run-up in JD stock this year, there appears to be concern with he leadership of Liu. It also does not help that Liu referred to some of his workers as “slackers” and that they are not his “brothers” (yes, this is probably something that won’t get good ratings on Glassdoor.com).
This was in response to the emerging discontent in China regarding long work hours. It is called “996,” which is a six day work week that has a daily schedule from 9 am to 9 pm.
Oh, and something else: JD.com appears to be in the midst of layoffs that could come to 8% of the workforce. There have also been departures of top executives, such as chief technology officer Chen Zhang and public affairs officer Ye Lan.
Now a restructuring is probably a good move, as the logistics platform is costly. In light of this, the company has also been looking at automation like robots. Yes, this is similar to the strategy of Amazon.com (NASDAQ:AMZN). But then again, this company has the advantage of the hugely profitable AWS platform.
JD Stock and Growth
Another issue for JD is the slowing of the Chinese economy. President Trump’s trade policies have taken a toll. It is also getting tougher for China’s economy to churn out growth because of its enormous size.
But it is important to note that JD has been experiencing a deceleration for quite some time. From 2015 to 2018, the revenue growth has gone from 55% to 31%. In fact, as of Q1, it has dropped to 17%.
What’s going on? Well, the ecommerce market in China is highly competitive. For example, this week Amazon.com indicated that it will close its Chinese online marketplace.
However, JD.com’s situation may be a case of execution as well. After all, even though Alibaba (NYSE:BABA) is much larger, the growth ramp was still a sizzling 41% in the latest quarter.
Bottom Line on JD Stock
I think the prospects for ecommerce in China remain bright. A big driver is the growth in the middle class, which is expected to hit a whopping 780 million within six years. And estimates are that the spending on ecommerce will jump from $470 billion in 2018 to $839.54 billion by 2021.
So this should be great for JD stock, right? Yes, this is true, but the problem is that the company appears to be the in retrenchment mode, which is probably resulting in lower morale. What’s more, the valuation is far from cheap, with the forward price-to-earnings multiple on 31X. Note that the current stock price is essentially in-line with the Street’s consensus price target.
To put this into perspective, BABA is at 27.6X, even though it is growing much faster and has a more diverse set of revenue streams. In other words, if you want to play the ecommerce trends in China, BABA looks like the better option right now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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