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Why Investors Should Buy JD.com Stock on Weakness

Will Healy

JD.com (NASDAQ:JD) has begun to recover from the struggles it underwent in 2018.  Among the positive catalysts for JD stock have been signs that the trade war between the U.S.  and China will likely come to a resolution soon.

Can JD stock keep growth investors interested?

Source: Daniel Cukier via Flickr

Longer term, China’s economy, however, will face obstacles. These obstacles are comparable to those the U.S. faced in the late 19th and early 20th centuries, in which spurts of growth often alternated with economic depressions. However, despite its past and future struggles, JD.com stock will rise in the long run, making any temporary setbacks it faces good buying opportunities.

Internal, External Challenges Weigh on JD Stock

JD stock faces significant near-term challenges Though the equity has rallied in recent months, it trades about 40% below the January 2018 highs that it reached before the trade war with the U.S. began. China’s  looming debt crisis could weigh on JD in the coming months and years.

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Controversy also continues to surround JD founder and CEO Richard Liu. Prosecutors in Minnesota declined to file criminal rape charges against him, but Liu faces a civil suit related to the incident. As InvestorPlace’s  Tom Taulli mentioned, Liu also made derogatory comments about his employees, and a number of key executives have departed the company.

The company’s business model has also been controversial. Like Amazon (NASDAQ:AMZN), JD invests heavily in vertical integration. The company’s spending on infrastructure for purchasing, storage, transportation, and delivery of merchandise has weighed on its profits. Many point to Alibaba’s (NYSE:BABA) higher profit margins and consider it the better stock.

JD Stock Is Not as Expensive as It Appears

However, I do see not believe that the forward price-earnings ratio of JD stock, which stands at 32.7 ,is expensive. Alibaba built its retail empire with an approach more like that of  eBay (NASDAQ:EBAY) than AMZN. BABA typically serves as a middleman, never owning the merchandise.

Still, despite JD’s high costs, its model has produced massive profit growth. Analysts predict that trend will continue, as they, on average, forecast a 65.7% earnings increase this year and a 58.6% surge in fiscal 2020. JD’s infrastructure investments may lead to lower profit margins in the short-term. Still, I think these investments will serve it well in the long run.

Moreover, JD remains focused on international expansion. It has already entered Thailand, Vietnam, and Indonesia. Furthermore, thanks to a partnership with Walmart (NYSE:WMT), it will enter the U.S. market. The company has also added offices and warehouses in Europe.

Like Amazon, JD is planning to open physical stores in its home market. It hopes to open 1 million convenience stores in China over the next five years. JD also intends to launch supermarkets and home-appliance stores in coming years.

Concluding Thoughts on JD Stock

The rise of JD will mirror the economic gains of Asia., so every significant pullback of JD stock creates a buying opportunity. The company’s fortunes declined over the last year, due to the U.S.-China trade war and Liu’s troubles. China’s debt problems could weigh on JD stock going forward.

However, the company will build on its massive growth by continuing to invest in  its infrastructure and add physical stores. JD’s expansion into Southeast Asia, the U.S., and Europe will provide it with more growth opportunities.

Not all of Amazon’s ventures have succeeded. Similarly, I do not expect all of JD’s moves to bolster JD.com stock. Macro economic competition and challenges could also disrupt its growth. Still, given JD’s opportunity to expand its successful business model both at home and abroad, JD stock could become a quintessential “buy on a pullback” equity for years to come.

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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