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Why JD.Com Inc(ADR) (JD) Stock Has More Room to Run

It turns out that there is more gas in tank for China’s internet stocks. JD.Com Inc(ADR) (NASDAQ:JD) reported before the bell on Monday that revenues grew 41% year-over-year in the most recent quarter. That beat Wall Street expectations, and propelled the stock markedly higher.

Why JD.Com Inc(ADR) (JD) Stock Has More Room to Run

With it, Autohome Inc (ADR) (NYSE:ATHM), SINA Corp (NASDAQ:SINA), Weibo Corp (ADR) (NASDAQ:WB), and Alibaba Group Holding Ltd (NYSE:BABA) all traded notably higher.

I think the rally in the group still has some runway, and I am especially bullish on JD stock.

Here’s why. Has Strong Tailwinds

It was just a great quarter for across the board.

Net revenues grew 41% and that isn’t expected to slow, with management guiding for 37% revenue growth next quarter. Gross merchandise volume grew 42%, with strength being seen across all categories. General merchandise grew 48%, led by a 70% surge in apparel and footwear GMV. Home appliances and electronics GMV jumped 37%. Ticket size also improved for JD.

More broadly, continues to benefit from a secular shift towards e-commerce., Inc.’s (NASDAQ:AMZN) most recent quarterly results were very good, powered by impressive retail growth. Other e-commerce focused retailers like Wayfair Inc (NYSE:W) have been on fire. So have e-commerce focused marketplaces like GrubHub Inc (NYSE:GRUB).

The shift is even happening within traditional retailers. Wal-Mart Stores Inc (NYSE:WMT) has reported strong e-commerce sales growth in recent quarters (a 31% increase last quarter). Although Target Corporation (NYSE:TGT) is struggling elsewhere, e-commerce sales there popped 34% last quarter. E-commerce sales also continue to soar at Macy’s Inc (NYSE:M) and Nordstrom, Inc. (NYSE:JWN). At JWN, e-commerce sales now represent one-quarter of the whole business versus just 8% in 2010.

So retail isn’t dead — its just shifting.

And will continue to be a winner.

JD Stock Can Go Higher

But does that mean JD stock will also continue to be a winner?

The stock is on one heck of a run. JD is up nearly 51% year-to-date, and the move looks almost linear in fashion except for a recent exponential uptick. With the stock coming off this big run, it is easy to look at JD stock’s 60-times 1-year forward price-to-earnings multiple and say the stock is expensive.

But that’s too simple. The Street is expecting JD’s earnings to more than double this year, and then double again next year. So investors are looking at 100%-plus compounded earnings growth over the next 2 years.

Is that feasible? Because of the secular shift to e-commerce accelerating in developing markets, I actually don’t see much risk to the 100% compounded earnings growth expectations.

In this sense, investors are paying 60-times forward earnings for 100%-plus compounded growth. That is a pretty good price/earnings-to-growth (PEG) profile. also has more cash than debt on the balance sheet, grew free cash flow by 40%-plus last quarter and produced an impressive $2.25 billion in free cash flow last year.

That is a pretty strong 6% free cash flow margin for JD. And its up from 3.9% the year before. Revenue scale should be able to continue to drive that sort of margin growth, so I think its pretty likely we see JD net 10% free cash flow margins by 2018. If revenues can jump to $60 billion or more by then (as the Street expects), then that is about $6 billion in free cash flow potential. Not bad for a $55 billion company.

In fact, a company with JD’s growth and balance sheet should trade around 10 to 15-times free cash flow. That implies a market cap of $60 billion to $90 billion by 2018. That is pretty big upside potential on the high-end of the range.

Bottom Line on JD Stock

It has been up, up, and away for JD stock since the beginning of the year. It looks awful risky up here at 60-times fiscal 2018 earnings and on top of a 51% run-up in 5 months.

But I don’t think that means its time to shy away from JD stock. Sure, the stock might get a natural pullback here as investors do some profit taking, but the long-term uptrend should remain intact. The growth story is only getting better.

As of this writing, Luke Lango was long AMZN.

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