China’s e-commerce sector is growing at breakneck speeds — a great investment opportunity if there ever was one. Enter highly respected short seller Jim Chanos, who accused Alibaba (BABA), China’s leading e-commerce company, of accounting irregularities, making the stock too risky for some investors and probably preventing the shares from rising much over the next year.
But, luckily for growth investors, the shares of another major Chinese e-commerce company JD.com (JD) are available for purchase by American investors. Much like Alibaba, JD.com is participating in the Chinese e-commerce party.
But unlike its larger peer, JD.com has not been accused of accounting irregularities by one of America’s most revered investors. Investors should buy JD stock so they can take advantage of the tremendous growth of Chinese e-commerce while avoiding dealing with the repercussions of Chanos’ allegation.
Despite worries over China’s overall economy, the two largest players in the country’s e-commerce sector, Alibaba and JD.com, are indisputably growing very quickly.
On Oct. 27, Alibaba reported that the gross merchandise value of its Chinese retail sites had jumped 28% in its second quarter vs. the same period a year earlier to a staggering $112 billion. GMV is the total value of merchandise sold on websites.
On the Nov. 11 Chinese Singles Day holiday, Alibaba’s GMV surged 60% vs. last year’s Singles Day, exceeding by a wide margin Deutsche Bank’s projection for a 40% increase.
But JD’s third quarter results,which it reported on Nov. 16, were in many ways more impressive than Alibaba’s Q2 results. The company said its direct sales revenue jumped 48.5% year-over-year in Q2, while the GMV of its marketplace business soared 121% Moreover, on Singles Day, the company’s GMV surged “more than 140%” year-over-year. Driven partly by strong partnerships with China’s leading mobile platforms, JD’s active customer accounts grew 59% year-over-year in the 12 months ended Sept. 30
Meanwhile, famed short-seller Jim Chanos has reportedly tried to convince his fellow investors to short Alibaba, citing unspecified “accounting concerns.” With many already wary about the trustworthiness of Chinese companies in general, Chanos’ statement will probably scare many investors away from Alibaba, likely preventing that stock from rising more than 15% over the next year, even if its results are stupendous.
But JD.com was not targeted by Chanos. In fact, the prominent investor recommended buying JD stock.
If JD.com does have an Achilles heel, it’s on the bottom line. The company actually reported a net loss of $83 .5 million for the third quarter, and net margins declined of 1.2%.
JD’s lack of profitability appears to have been driven by the costs of expanding its business. For example, the company said its general and administrative expenses jumped 72% year-over-year last quarter, as it expanded the scale of its operations and entered new businesses. Similarly, JD.com’s fulfillment expenses jumped 63% last quarter as it grew its fulfillment infrastructure.
A highly successful, rapidly growing e-commerce company that’s failing to generate profits. Does that sound familiar?
It should, to investors who have followed Amazon.com (AMZN) at all over the years.
In 2015, Amazon has shown that years of investments in e-commerce operations can bear some serious fruit, eventually propelling an unprofitable company into the black and causing its stock price to double in a year. JD.com looks poised to follow a similar script.
Moreover, JD.com’s valuation is not too demanding, compared with other rapidly growing companies. Its trailing 12-month price-to-sales ratio is 1.72, vs. 15.5 for Alibaba, 7.85 for Tesla (TSLA) and 7.21 for Baidu (BIDU), according to Capital IQ.
With JD.com, investors can get a piece of the rapidly growing Chinese e-commerce sector without being saddled by the baggage that Chanos’ accusation has placed on Alibaba. They should definitely take advantage of that opportunity by buying JD stock.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities