Where Does JD.com Stand After the Richard Liu Rape Allegation?
In this segment from the MarketFoolery podcast, host Chris Hill and senior analyst Matt Argersinger try to unpack the news that over the weekend, Richard Liu, CEO and founder of JD.com (NASDAQ: JD), was arrested in Minneapolis on allegations of rape and held in police custody for 16 hours.
Then he was released without charge and allowed to fly home to China -- which would seem fairly unusual if authorities intended to file charges later. So why was a Chinese billionaire in Minneapolis in the first place, what might have convinced the police not to keep him from leaving their jurisdiction, and how does it all impact the company and its investment thesis? The Fools break it down as best they can with the limited information available to the public.
A full transcript follows the video.
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This video was recorded on Sept. 4, 2018.
Chris Hill: We've got to start, though, with JD.com. That's why Matty's in the studio, so he can explain what is going on. JD.com, second-largest e-commerce company in China after Alibaba. Shares down 6% this morning and hitting an 18-month low on the news that CEO Richard Liu was arrested on suspicion of criminal sexual conduct. He was released. This took place over the weekend in Minneapolis. I have so many questions, I'm not really sure where to start here. I guess the thing that struck me right off the bat was, wait a minute -- no disrespect to Minneapolis, Minnesota, but what's going on in Minneapolis that the billionaire CEO of the second-largest e-commerce company in China is hanging out there?
Matt Argersinger: Well, he's there because he's doing an executive doctoral program. The University of Minneapolis has a relationship with this really prestigious university in China where he's actually doing most of his studies. So, there's a reason for him. I was kind of befuddled by that, too. What is he doing in Minneapolis? Is he pursuing a degree? But, that explains that.
The news, though, about the accusation... we know very little, but the facts so far suggest to me that this was either a terrible misunderstanding -- and I mean terrible -- or he was potentially targeted by someone, maybe someone or some organization, looking to sully his reputation, frame him as a criminal. I'm not sure. And I'm only saying this -- and I don't know the facts -- because, even if there was very little evidence, I find it hard to believe that the Minneapolis police force would release him without bail and let him go back to China if there really was something to this. It's just strange to me that he was arrested, he was in jail, he was released --
Hill: He denies any wrongdoing.
Argersinger: Right. And his lawyer -- whose name, by the way, is Earl Gray, which I think is fantastic -- said it's highly unlikely that any charges will ultimately be brought. So, there's that. But then there's also, of course, well, the reputation right now is pretty sullied. In many ways, the damage might already have been done.
Hill: This is a company that you've studied for a while. We've talked about plenty of companies in other industries where the leadership of the company is one of the main reasons for the bull case for that company and for that stock. When you look at JD.com, up until last weekend, how much was Richard Liu a part of the bull case for buying shares of JD.com?
Argersinger: Unfortunately, I would say, to me and I think most analysts here, would say about 75%. He's a founder of this company. He owns a major stake in the business. He essentially has spearheaded the company's growth for two decades. He controls 80% of the voting power. He makes all the big decisions for JD.com. So, when I say the damage is already done, you also have to understand, he's also a bit of a celebrity in China. He's also married to a celebrity. He's a billionaire. You mentioned that JD.com is the second-largest e-commerce company. It's actually the largest retailer, direct-to-consumer retail, by revenue. He's a big figure in China. It's as if he's Jeff Bezos, but if Jeff Bezos was more public than he is in the United States. I think that's how you define Richard Liu in China. I agree, an investment in JD.com to me is an investment in Richard Liu. Not only that, you have major corporations like Walmart, Alphabet, Tencent, who have invested in JD, had partnered with JD. To what extent does this story, if it goes anywhere, hurt their interest in working with JD.com in the future? A lot of risks have bubbled up now. If you're a proud shareholder of JD.com -- and I am a proud shareholder, or, was -- you feel a bit less proud, you feel a little more worried today. A little more anxious.
Hill: On the flip side -- we've talked before about, it's been an odd year for Chinese stocks. When you look at some of the biggest players, you look at Alibaba, iQiyi, Baidu, stocks that are, as a group, down around 20% or so year to date -- in some cases, more than that. I think the last time you were in the studio, you said something to the effect of, "If these things go any lower, they're going to start looking absurdly cheap." In the case of JD.com, it's at an 18-month low. For anyone who's trying to be opportunistic, it seems like maybe now is the time to take a long look at this. If he is completely exonerated, and you factor in all the partnerships, that his leadership continues, all that sort of thing, then of all of the Chinese stocks that we've talked about, this might be, arguably, the one that is the most undervalued at this point in time.
Argersinger: I agree. I mean, I thought it was cheap at $40 a share. Now it's under $30 today after the news. It's trading for less than 1X its annual revenue. You can actually strip out a lot of parts of the business -- the logistics business, the finance business -- and it's even cheaper, if you're just valuing the core e-commerce business. China stocks across the board are cheap. My only hesitation with JD -- and I would say the same with Alibaba -- you are a little bit betting on the entrepreneur, at this point, the tycoon behind this company. If this story does go anywhere, I don't think it will, but if it does, even as cheap as JD is ... I'd wait for more news. I'd wait for confirmation.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill has no position in any of the stocks mentioned. Matthew Argersinger owns shares of Alphabet (C shares), Baidu, iQiyi, and JD.com and has the following options: long January 2020 $50 calls on JD.com and short January 2020 $50 puts on JD.com. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, JD.com, and Tencent Holdings. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.
