Shares of Chinese e-commerce provider JD.com, Inc. (ADR) (NASDAQ:JD) have hit some turbulence of late. Between June 2016 and August 2017, JD stock rose 150%, boosted by increasingly good JD.com news. Since then, trading has become a bit more choppy, and JD.com stock has pulled back about 19% off those August highs.
From a long-term perspective, however, I don’t think the rally in JD stock is close to being over. To be sure, JD shares are not cheap, trading at 45x next year’s analyst EPS estimates. But those same analysts are almost uniformly bullish on JD stock. The average target price is above $50, representing 25%+ upside from current levels.
It’s not difficult to see why. JD.com is taking market share in a market that is growing quickly and likely has decades’ worth of growth in front of it. It has investments across the region, which will spread its reach beyond simple e-commerce sales. While rival Alibaba Group Holding Ltd (NYSE:BABA) gets the media headlines, it’s JD.com that is growing faster and is the biggest threat to Alibaba. And as Q3 earnings and other JD.com news come across the wires, I believe the rally in JD stock will resume.
JD.com News Still Looks Pretty Good
As I wrote at the time, JD.com’s Q2 earnings report in August looked extremely impressive, and yet investors sold off JD stock regardless. JD stock’s 42% revenue growth beat consensus estimates by more than three points. Expenses are keeping pace for now, particularly in terms of marketing, and that so far has limited operating leverage and profit growth.
But that’s OK, certainly for now. JD.com is executing a strategy not all that different from Amazon.com, Inc. (NASDAQ:AMZN), spending to acquire customers now in exchange for establishing a larger base of profits down the line. With AMZN stock nearing a return to $1,000, investors there clearly respect the strategy. JD.com should get the same leeway because its strategy is clearly working.
JD.com and Alibaba
JD.com’s obvious goal is to catch Alibaba in the Chinese e-commerce race. CEO Richard Liu told CNBC in September, referring to Alibaba, that “Within five years, I’m sure we will surpass them to be the largest B2C platform in China.”
It’s a lofty goal. Alibaba’s Tmall had nearly 57% share in 2016, against less than 25% for JD.com, according to figures cited by CNBC. But as InvestorPlace columnist Luce Emerson detailed in August, JD.com has been closing the gap over the past two years. JD.com has invested more in its infrastructure and user experience, and with marketing spending up, it has the potential to continue its market share gains.
Simply from a valuation standpoint, that seems to imply a huge opportunity. JD.com stock is worth about $55 billion. Alibaba’s market cap, on the other hand, is a whopping $466 billion. If JD.com indeed catches Alibaba — or even comes close — then JD stock almost certainly will rise substantially over the next few years.
Risks and Opportunities for JD Stock
The one obvious caveat relates to the Chinese economy as a whole. For all the growth opportunities apparent as the country’s 1.3 billion inhabitants move toward the middle class (or beyond), China still is a Communist country. And there remain concerns about whether the centrally managed economy can continue the torrid growth it’s driven over the past quarter-century.
That risk needs to be kept in mind when considering JD stock. But investors in other China-exposed names, like Macau-facing casino operators such as Wynn Resorts, Limited (NASDAQ:WYNN) and Las Vegas Sands Corp. (NYSE:LVS), have been well-compensated for taking similar risks. And of course, both BABA and JD stock have broken out of late, with BABA stock actually more than doubling in 2017 alone.
As far as JD.com goes, there are opportunities beyond the e-commerce business to keep in mind as well. The company has partnerships across the region, including an in-country deal with Wal-Mart Stores Inc (NYSE:WMT). JD.com has invested hundreds of millions of dollars in markets like Indonesia and Thailand as well.
There’s a two-pronged bull case here, then. The core business can continue to take share from Alibaba and benefit from the stunning market growth in Chinese e-commerce. Meanwhile, investments in everything from an e-commerce joint venture in China to ride-sharing services in Indonesia provide incremental income and potential for deeper partnerships down the line.
It’s a solid bull case, and as JD.com news continues to be good on the earnings and strategic front, it’s a case that is likely to gain favor with investors. JD stock has the risks attendant with any emerging market stock. But it also offers potential rewards that few of those emerging stocks can match.
As of this writing, Vince Martin has no positions in any securities mentioned.