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Western Expansion, Offline Retail Will Drive JD.Com Inc Stock Higher

Luke Lango

The new year has been a great one for stocks, but especially for China’s leading digital retailer, JD.Com Inc(ADR) (NASDAQ:JD). While the S&P 500 has rallied 3% to start 2018, JD stock is up more than 12% in less than 2 weeks of trading.

But this stock has been roaring for a while. Since early December 2017, JD stock is up more than 25%.

What is driving the rally? General enthusiasm regarding secular growth prospects in China’s booming retail market. But more specifically, this recent rally has more to do with JD’s western expansion and its offline retail push than anything else.

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Those are strong fundamental catalysts which bolster the long-term growth narrative. Moreover, technicals imply that this breakout in JD stock could last for another several months. All together, I think JD stock heads materially higher over the next 12 months.

Here’s a deeper look.

Fundamentals Are Strengthening for JD.Com

JD’s fundamental growth narrative has always been strong. The digital retailer is a pure-play on China’s booming retail market, which is not only rapidly growing, but also rapidly digitizing and consolidating. All of those trends benefit JD.Com, which is the leading digital retailer in China.

This growth narrative hasn’t wavered recently, not is it showing any signs of forthcoming weakness. Consequently, JD stock should head higher on the China retail boom alone.

But the stock has had a massive move higher recently due to other catalysts, which only widen the scope of JD’s long-term growth narrative.

Firstly, there is the whole offline retail push. Following in the footsteps of Amazon.com, Inc. (NASDAQ:AMZN) and Alibaba Group Holding Ltd (NYSE:BABA), JD.Com is plunging into the grocery world. The traditional digital retailer plans to open 1,000 fresh-food stores over the next 3-5 years.

This is a big move. All the sudden, JD is not just a digital retail company. It has transformed into an omni-channel retail company that will more deeply tap into China’s grocery market, which is the largest in the world (and only growing, considering US per capita food spend is still more than than four times as great as China’s per capita food spend).

This is a critical pivot because: 1) not everyone does all their shopping online, 2) JD is already perfectly set up to address this market, as it can leverage its massive logistics network to do grocery delivery, and 3) groceries are a retail end-market with sustainable long-term demand.

It also means that JD can sell other products through these groceries, thus fully extending its retail footprint to the brick-and-mortar format.

Secondly, JD is expanding westward. JD has it sights set on a big European expansion over the next several years, and France, whose president is pushing for a more open business relationship with China, is set to be the center point of those European expansion plans. Indeed, JD expects to sell roughly $2.4 billion worth of French merchandise by 2019.

That is a sizable 4% bump to this year’s expected sales, but the long-running benefits are much bigger than a 4% sales boost. JD.Com CEO Liu Qiangdong said at the World Internet Conference not too long ago that JD was looking at both a big Europe and big US rollout as early as next year. The chips have fallen in place for that big Europe rollout, so, naturally, it looks like a US rollout will come next.

If JD.Com can tap into the burgeoning European and US digital retail markets, that would be hugely additive to the company’s value. Digital retail sales in the US were north of $430 billion over the past 12 months, and increased nearly 16% last quarter. Meanwhile, digital retail sales in Europe topped $330 billion in 2017 and grew at a 12% pace.

Overall, then, westward expansion means JD will start tapping into a $760 billion-plus market growing at a double-digit rate. Undoubteldy, even minimal penetration in that market will add tremendous value to JD.

Bottom Line on JD Stock

JD’s strengthening fundamentals come against the backdrop of a stock that is in total breakout mode.

The 20-day exponential moving average has strongly crossed back above the 50-day exponential moving average after spending months below the 50-day EMA. The last time this specific golden cross pattern emerged (20-day EMA breaks out above 50-day EMA after spending months below the 50-day EMA) was in mid-2016.

JD stock proceeded to rally from the low-20s to the high-40s over the next 12-plus months.

JD stock could very likely make a similar rally from here, as westward expansion and offline retail widen the company’s long-term growth narrative.

As of this writing, Luke Lango was JD, BABA, and AMZN. 

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