Some important times for China-based retailers are approaching. For example, JD.Com Inc(ADR) (NASDAQ:JD) will maximize revenue when Singles Day in the region arrives on Nov. 11. Chances are good that JD.com, Alibaba Group Holding Ltd (NYSE:BABA) and Tencent will all report record-breaking year-over-year sales on that day. As online traffic soars, demand for JD.com’s network services will go up. Awareness for online deals and promotions likely grew in the last year and the new partnership JD has with Tencent and Wal-Mart Stores Inc (NYSE:WMT) will only draw consumers.
On Oct. 18, JD.com made a data deal with Tencent, along with Wal-Mart, to enhance its understanding of consumer behavior. JD.com will supply the online and offline shopping data. Tencent will supply the social platform. The partnership should give valuable insight into how consumers behave, what they prefer and lead to better-targeted marketing.
Valuation of JD Stock
At a price of around $40/share, JD stock trades at a premium of 45 times forward earnings. Yet the stock is down nearly 17% from yearly highs and is underperforming the market. An analyst upgrade from Wells Fargo, a low short float and expectations of sales growth of over 65% in the next five years justify the unfavorable valuations. By comparison, BABA trades at a 26x forward earnings. However, JD is more focused than Alibaba in online retailing and has a better distribution network.
Based on three models from users on finbox.io, JD.com has 25 percent upside. The most optimistic valuation uses a revenue multiples model that compares JD stock to that of Amazon.com, Inc. (NASDAQ:AMZN), Alibaba, Vipshop Holdings Limited (NYSE:VIPS), and Jumei International Holding Limited (NYSE:JMEI).
Jumei and Vipshop may best compare to JD.com as a retail play. Alibaba is still the best for comparing it to JD, because its prospects depend on the Chinese market. Selecting an expected value/forward revenue multiple between 0.7 and 1.7 implies that JD.com has downside of around 23% and upside of up to 74 percent.
A 5-year discounted cash flow growth exit model that assumes revenue growth in the range of 17% to 45% would imply a fair value of around $43.50 for JD stock.
On Simplywall.st, JD.com’s intrinsic value, based on future cash flow, is below $25 a share. The model does recognize that the company will grow faster than the U.S. market average and that annual earnings will grow by nearly 73%, but JD must also report positive earnings in 2018. From 2015-2017, the company lost money on an earnings-per-share basis.
Investors may forgive the company for reporting losses in the short-term, as the long-term outlook is strong. The company continued spending more on marketing: its expense ratio rose to 4%, up from 3.3% year-over-year. Management expects core operating margin will improve annually.
Recognize that JD is expanding its market reach, which implies the company will realize its revenue potential over time. On Sep. 15, the company formed a joint venture with Central Group, a Thailand-based retailer, by investing $500 million. It invested in Go-Jek, an Indonesian e-commerce firm. JD.com was driven to make an investment in Farfetch in an effort to fulfill the demand of Chinese customers for luxury products. What’s more, JD.com is launching its own luxury platform. Farfetch’s merchants are unique, so it will not compete with JD’s channels. Hence, by building its own platform and investing in others, JD will grow its key account, bringing traffic to its own sites as well.
JD is an attractive growth vehicle for investors seeking exposure to the Chinese online retail market of luxury goods.
The stock is off from yearly highs, but could rally back there if the company reports a good quarter and forecasts a stronger outlook for the quarter and year ahead.
Disclosure: Chris Lau does not own shares in any of the companies mentioned. He is an author of Do-it Yourself Value Investing.