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It’s Time to Move From Alibaba Group Holding Ltd to JD.Com Inc(ADR)

Since its shares peaked in August 2017, JD.com, Inc. (NASDAQ:JD) is having trouble getting its investors enthusiastic about anything. The company announced ambitious expansion plans in 2018, teamed up with Industrial and Commercial Bank of China and reported strong third-quarter results… yet, JD stock has barely budged.

It's Time to Move From Alibaba Group Holding Ltd to JD.Com Inc(ADR) (JD)
It's Time to Move From Alibaba Group Holding Ltd to JD.Com Inc(ADR) (JD)

Source: Daniel Cukier via Flickr

Relatively high valuations are scaring away stock buyers.

Strong Third-Quarter Results

JD.com reported approximately $151 million in profits, beating analyst estimates of a loss of ~$32 million. The company’s revenue grew 39 percent year-over-year, while gross profit improved 50% to around $2 billion. Even more impressive was JD’s EBITDA from continuing operations — it more than doubled to $300 million. JD.com’s online direct sales and services both grew at a very healthy pace as well.

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Looking ahead, management forecast fourth-quarter net revenue to grow by a minimum of 35% YOY.

With the strong quarterly results and outlook, bulls should wonder why JD stock is not rallying. Valuations and a shift of money out of China-based firms are largely to blame. Baidu, Inc. (NASDAQ:BIDU), which trades at a 33 price-earnings ratio, and Alibaba Group Holding Limited (NYSE:BABA), with trades at a 50 P/E ratio, are two other examples of richly-valued Chinese firms.

Still, experts expect JD.com to grow earnings by over 20 percent in the next five years. Even growth for Alibaba’s earnings will slow to the single digits next year.

JD.com growth

JD.com depends on high-end apparel sales for its revenue growth and it may face headwinds as competition in China heats up. But if the company expands its profit margin as it grows the business and sells more in volume, the JD stock price will go up.

JD’s management is also confident that it will ramp up apparel sales in the next two quarters. Its expansion in Europe and the U.S. as early as next year (which is only a month away) will fit JD’s strategic growth goals. This move serves two purposes. First, it increases the company’s addressable market. Second, consumers will recognize the brand more readily.

JD’s entry into the U.S. markets is not without risk. Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) will not just let the apparel store company take its market share. But JD.com has the know-how to grow its business and has a good chance of succeeding in these new markets.

In the online space, it is Amazon.com, Inc. (NASDAQ:AMZN) that JD may have a hard time beating. Given JD’s success in China, management could quickly prove that it will thrive in the U.S. markets. In light of JD’s profit growth in China, the retailer has the funds and the positive momentum to replicate its business model in the U.S.

Digital Banking

To complement its retailing business, JD.com is teaming up with Industrial & Commercial Bank of China to offer digital banking services. The partnership is a win-win. Alibaba invested in Alipay to complement its online retailing site and, similarly, JD.com’s initiative in digital banking will likely find the same success.

Final Word on JD Stock

Alibaba’s strong performance overshadows that of JD stock. BABA stock has already doubled. But JD.com’s downtrend will eventually end when it reports another strong quarter.

With JD.com’s strong growth numbers, it is now time for JD stock to start outperforming BABA. JD will thrive for many years to come as it sells products that customers need and want.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

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