From a fundamental standpoint, JD.Com Inc(ADR) (NASDAQ:JD) seemed to do everything right in its second quarter. JD.com posted impressive growth and a nice beat relative to Wall Street consensus … but investors are selling off JD stock in Monday’s early trading regardless.
It’s not hard to see why.
JD stock isn’t cheap, trading at over 100 times 2017 analyst estimates. It may just be that the second quarter was good, but not good enough, given an 80% year-to-date run in shares.
But for investors willing to take on the risks here relative to both valuation and China’s economy, JD shares might be worth considering on this morning’s pullback.
JD.com’s Second-Quarter Earnings
All told, JD.com’s Q2 looks reasonably strong. Revenue of $13.75 billion rose nearly 42% year-over-year, with growth more than three points better than Wall Street analysts expected. Non-GAAP EPS of 10 cents beat consensus by a pair of pennies.
Below the headlines, the news looks good as well. GMV (gross market value) from direct online sales increased 44% year-over-year. The company’s marketplace business — similar to that of Amazon.com, Inc. (NASDAQ:AMZN) in the U.S. — saw GMV rise 50%.
One investor concern might be that expenses rose nearly in lockstep with earnings, with a 63% jump in marketing expense outpacing revenue. Operating margins remain relatively narrow, with Q2’s non-GAAP margin at just 0.6%, down from 0.8% the year before.
But that shouldn’t necessarily be a surprise.
Like Amazon, JD.com is spending money at the moment to create a base of future business. Unlike Amazon, JD.com has a larger competitor in Alibaba Group Holding Ltd (NYSE:BABA) from whom it’s trying to take market share. That requires intensive marketing and fulfillment spend – and likely drove some of the margin weakness in the quarter.
Still, that spend is working, given the impressive growth on the top line. And that makes the pre-market decline in JD stock somewhat surprising.
JD Stock Looks Solid Long-Term
All told, Q2 looks like good news for JD … even if investors aren’t necessarily reacting that way. Free cash flow in the quarter was almost $3 billion, and over $2.4 billion excluding its JD Finance business, which is being sold to a group of outside investors. Trailing 12-month free cash flow of more than $4 billion implies a much more reasonable 16x P/FCF multiple.
And the story here continues to play out.
JD’s logistics network, a major pillar of its efforts to take share from Alibaba, continues to grow. JD.com continues to build out its high-end business, as it invested in luxury e-commerce business Farfetch and rolled out JD Luxury Express to offer “personalized service” for wealthy clients. On the end, a partnership with Wal-Mart Stores Inc (NYSE:WMT) continues to drive growth.
The early morning pullback in JD stock looks more like a case of expectations being too high than the results not being good enough. 42% revenue growth and a 59% increase in non-GAAP net income certainly shows the growth story remains on track. Investors might be selling JD stock this morning, but it seems likely they’ll come back some time soon.
JD shares aren’t cheap — but after a quarter like Q2, they probably shouldn’t be.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
