JD.Com Inc(ADR) (NASDAQ:JD) — the No. 2 e-commerce operator in China — has had a rough year because of concerns with the deceleration of the growth ramp. However, investors might have been too negative about the situation, as JD stock is up around 5% to $23.5 in early trading after releasing its latest earnings report.
Still, the quarter wasn’t necessarily a standout, so why did JD stock jump?
While revenues were up 42% to $9.8 billion, it was still the slowest rate since the company came public in the summer of 2014, and it was in-line with Wall Street’s expectations.
Oh, and the guidance was underwhelming. For the current quarter, the company is expecting revenues to increase at about 34% to 38%, off the analysts’ consensus of 39%.
A key factor for the slackening of growth has been the Chinese economy, among other factors, such as the continued deterioration in PC sales and the maturation of the smartphone market.
Why JD Stock Jumped After Earnings
Although the results might not have been stellar, the company did show that it’s getting leverage in its business, resulting in improved margins. Consider that the non-GAAP operating profit came to 0.6% in Q2, which was up from a loss of 0.5% in the same period a year ago.
There were also some other highlights:
- JD.com is now the preferred marketplace for the launch of major products from Lenovo
- There are now about 100,000 merchants on the online platform.
- JD.com currently has 234 warehouses and 6,756 delivery stations and pickup stations.
- A variety of international brands — like New Look, Louis XIII and Shiseido’s Anessa — launched online stores on JD.com.
Yet perhaps the most meaningful deal is with Wal-Mart Stores, Inc. (NYSE:WMT), which involves a 5% investment in JD. The arrangement also calls for investments in infrastructure as well as launching Sam’s Club on JD.com. The company has also taken control of WMT’s online business, called Yihaodia.
Bottom Line on JD Stock
Taking the long-term view, the prospects for JD stock do look fairly attractive. According to Forrester, the e-commerce market in China is likely to thrive despite the slowing in the overall economy. The research firm projects that online sales will reach $1.1 trillion by 2020; up from $589 billion in 2015. So yes, there is lots of room for the company to gin up growth.
Furthermore, the company’s business model may ultimately prove better than rival, Alibaba Group Holding Ltd (NYSE:BABA). BABA essentially operates like eBay Inc (NASDAQ:EBAY), in which merchants list products on the website and fulfill the orders. But this can mean slower shipment times and even dicey quality of the products, including counterfeits (which have been a major issue for BABA and has made it more difficult to get the buy-in from larger brands).
However, the company controls its own logistics and handles the inventory, similar the strategy of Amazon.com, Inc. (NASDAQ:AMZN). And the valuation on JD stock looks compelling, with the multiple at about one times sales. By comparison, AMZN trades at a much more robust 3X.
Thus, for investors seeking an interesting value play on the e-commerce opportunity in China, JD stock looks like a good choice.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He also operates BizDeductor, which provides tax services for the self-employed and gig workers of Uber, Lyft & Airbnb. Follow him on Twitter at@ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
