Can JD.com Deliver? | EMQQ
JD.com’s stock (JD) reached an all-time low of
$19.27 in late November 2018. Since then, it has rallied over 60% to
reach its $30 current price level.
We continue to view
JD stock as offering compelling value. Many of the concerns surrounding
the stock have been either dissipated or have been addressed. The
company’s growth initiatives, namely building out its logistics and
international business may present investors with a unique investment
opportunity.
What caused JD’s recent price activity and how have
these concerns been addressed?
Revenue and margins
JD was not alone in
experiencing a sell-off of its shares in late 2018. Many of JD’s peer,
such as Alibaba (BABA), Baidu (BIDU), and Tencent (TCEHY), collectively
referred to as the BATS, also sold off in late 2018 due to concerns about the
Chinese economy and the trade war with the United States. However, JD has
its own unique issues that went beyond the mere economic malaise.
According to an
article in InvestorPlace, investors were concerned about JD’s slowing revenue
growth and declining profit margins.[1]
A good portion of the slowing revenue growth could be attributed to the overall
slowing in the Chinese economy. The company also attributed the margin
compression to investments in growth initiatives like logistics, cloud, and
international expansion. While these projects may contribute to long-term
growth, they can eat away at short-term profit margins.
The Rally
A more recent
InvestorPlace article highlighted that the company’s fourth quarter earnings
report shed some clarifying light on matters and may have helped investors
become more bullish on the stock.[2]
First, the company beat earnings expectations.
In addition, the company gave some clarification on its underlying business
that investors, based on stock price action, viewed positively. For the
core business, what the company calls JD Mall, operating income, in local
currency, rose from RMB4.96 billion in 2017 to RMB7.05 billion in 2018, which
implies a rise in operating margin from 1.4% to 1.6% according to the article.
The article went on to note that slim margins in its
core business, along with upfront spending in areas like logistics,
international expansion, and customer acquisition costs are primarily
responsible for the company’s losses. In essence, the company is spending
now to finance future growth.
Logistics - a clear distinguisher
While Alibaba is
called the “Amazon of China,” JD’s business model is closer to that of the U.S.
giant. While Alibaba acts as an intermediary between buyers and sellers,
JD owns the majority of its inventory.[3]
As a result, it has, and continues, to build out its logistics
infrastructure. During April 2017, JD created JD Logistics, an
independent, standalone subsidiary that would provide logistics for its own
business as well as outside companies. It is anticipated that the company
may IPO in the future.
International expansion
Over the past two
years, JD has moved aggressively into Indonesia, according to InvestorPlace
which noted that in 2017, the company made a $100 million investment in
ride-hailing company Go-Jek.[4]
It later made a $500 million investment in a fintech and ecommerce solutions
company. In 2018, JD opened a cashless store in Jakarta and launched
JD.ID, a virtual store-shopping experience.
Googling JD
During 2018, Google
parent Alphabet Inc. (GOOGL, GOOG) invested in JD through a purchase of 27
million JD shares.[5]
The investment will give JD more cash to build out its logistics capabilities
and to fund its international expansion, particularly into other areas of
Southeast Asia. According to the article, Google and JD will work on unspecified
initiatives which will combine Amazon’s technology with JD’s
infrastructure. The deal will also allow JD to sell through Google
Shopping in multiple regions.
JD - In a flash
JD.com also has a 7%
ownership stake in Chinese ecommerce company Vipshop which offers discounted
merchandise online via a flash sale strategy.
Summary
To be sure, JD stock,
trading at 33X forward earnings and 4.6X book value (as of 4/9/19) is not
cheap.[6] Although the company’s profit
margins have deteriorated, it is because the company is spending to fuel future
growth. The company’s international expansion and the build-out of a
standalone logistics company may continue to distinguish JD from its
competitors and present investors with future value.
We continue to view
JD.com stock as a compelling value.
Find out more about the EMQQ Emerging Markets Internet & Ecommerce UCITS ETF (EMQQ).
As of 24th June 2019, the Emerging Markets Internet & Ecommerce UCITS ETF (EMQQ) held 5.18% of its weight in JD.com.
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