Alibaba Group Holding Ltd (NYSE:BABA) isn’t the only Chinese e-commerce firm worth considering right now. Its smaller but equally as fierce competitor, JD.com, Inc. (ADR) (NASDAQ:JD), is getting a lot of attention as well.
JD stock comes at a much lower price point than BABA, though the firm trades at a whopping 84 times its future earnings compared to BABA’s price/forecasted earnings ratio of 36 and the S&P 500’s average of just 20.
No, JD.com certainly isn’t a cheap buy, but bulls say the stock has the potential to explode in the years to come. Some compare the firm’s setup to that of Amazon.com, Inc. (NASDAQ:AMZN) and point to its strategic partnerships as a reason to get on board now.
However, bears look at JD stock’s 11% decline over the past month and say, “I told you so.” JD has a lot of competition to contend with, and the firm’s setup may be costlier than management is letting on.
It’s true that JD.com has a lot going for it, but investors who are thinking about adding the stock to their portfolios should also keep in mind that the firm also carries a relatively large amount of risk as well. Here’s a look at the pros and cons for JD stock.
Pro: Asset Heavy
One of the things that JD.com has done differently from competitor Alibaba is that the company owns a lot of its own inventory. JD also owns its own logistics network, making it easier to offer speedy delivery options. This closely resembles Amazon’s approach to creating a one-stop online shopping site that offers customers perks like one-day and free shipping.
JD has a massive footprint of 335 warehouses and upward of 7,000 delivery stations. The company has also invested in delivery drones, something that many believe will be the next step for the logistics industry.
The fact that JD has already set up this huge network and logistics business puts it a step ahead of competitors and gives the firm a better value proposition for customers than some of its peers.
Con: Asset Heavy
While JD’s massive network works in the firm’s favor, it could also end up working against the company as well. Many analysts worry that JD’s infrastructure could be costlier to run than management has estimated. As the firm continues to expand, fulfillment centers may not be quite as efficient. One of the problems that JD faces is that China’s population is spread out over rural areas. In those lower-income, less dense areas, operating warehouses and logistics vehicles will cost more per order than they would in a big city where purchases are larger and deliveries can be grouped to save time and money.
Primarily serving China’s market could turn out to be a huge boon for JD.com. Not only have we seen China’s middle class grow, but the firm’s retail landscape has only just started to shift toward e-commerce. That means that established companies like JD will benefit as more and more of China’s population starts to shop online.
E-commerce only represents about 15% of China’s retail market right now and just over half of the country’s population is using the internet. That means there’s a ton of room for growth as online shopping gains momentum along with Internet use.
While there’s a lot of potential in the Chinese market, there’s also a lot of risk associated with it as well. Regardless of industry, it’s potentially riskier to buy a Chinese company than it is to buy an American one because transparency is a concern. The Chinese government has much tighter control over financial markets and businesses, and there’s a lot of uncertainty regarding policy changes and how they might affect businesses.
Not only that, but you also have to consider the fact that China’s population is different from that of the U.S., and that could impact how a shift toward e-commerce plays out. The urban population in China is around 58%, compared to 82% in the U.S. That means that what worked for Amazon in terms of fulfillment centers and logistics networks might not work for JD because the population is far more spread out than it is in the U.S.
Pro: Strategic Partnerships
Something that JD has definitely done right is strategic partnering. The firm has been able to align with other brands in order to make its own business stronger, and that’s something the bulls have applauded. In particular, JD.com’s relationship with Tencent has been a huge draw for the stock.
The retail industry has become increasingly more social and the JD/Tencent partnership means that JD.com has access to WeChat, a popular Chinese app that lets users do everything from messaging friends to booking taxis. Increased use of mobile devices over PCs means that WeChat is a valuable ally, and JD has been able to grow user traffic using Tencent’s social-networking products.
While JD’s choice to operate an asset-heavy business gives it a strategic advantage over its peers, it’s important to note that the firm is facing a great deal of competition. There’s no question that Alibaba is the number one e-commerce platform in China, and in that respect, JD.com will always be playing catch-up. Alibaba is engaging about 70% percent of China’s internet users, making it the first port of call for retailers wanting to improve their online presence. The fact that BABA has already made such a huge impact on China’s e-commerce market could limit JD’s future growth.
Not only that, but stiff competition from Alibaba could force JD to spend more on its fulfillment and distribution centers to maintain its service edge and attract customers. If that’s the case, JD’s aggressive investment in its own business might pull profits down, at least in the near term.
The Bottom Line on JD.com
JD.com has a lot of potential over the next few years. While the firm is still stuck in Alibaba’s shadow, JD has a lot of strategic advantages that may help the platform grab market share from its rival. If you’re comfortable taking on the risks associated with it, JD stock isn’t a bad buy in the retail space.
As of this writing, Laura Hoy was long AMZN stock.