It’s easy to take a look at JD.Com Inc(ADR) (NASDAQ:JD), and think of it as a cross between eBay Inc. (NASDAQ:EBAY) and Alibaba Group Holding Limited (NYSE:BABA) or Amazon.com, Inc. (NASDAQ:AMZN). After all, take a look at the JD stock description and it sounds very familiar.

JD.com sells mobile handsets, consumer electronics, auto parts, home appliances and general merchandise. It has an online marketplace for third-party sellers including fulfillment services, transaction processing and billing services, and online marketing services. It offers supply chain financing and microcredit, consumer financing, and online payment.

Very similar to Amazon, it has 256 warehouses and almost 7,000 delivery stations across China.

Rural Strategy

Now, make no mistake, e-commerce is on fire in China. More than 500 million people shopped online in China last year, and the channel still only accounts for 15% of the total market. JD.com owns 25% of that market, or about 6.25%.

Bulls think that JD is going to start franchising rural stations where uneducated people can make online purchases with assistance; the thinking is that this opportunity will be worth billions.

That may or may not pan out.

They also point to JD Direct, which is basically a showroom for products where they can be viewed and tried, and then instantly purchased online. Sounds like a huge waste of space to me.

It also sports numerous strategic investments.

This is all well and good, but there are two huge problems here. First, look at valuation. Yeah, everyone always gets excited about revenue growth. JD grew revenue from $18.5 billion to $37.4 billion between FY14 and FY16 — a 100% increase.

Operating income improved from a loss of $935 million to a loss of $309 million.Yet bottom line net income went from a $2.09 billion loss to a $547 million loss. I’m supposed to get excited by a company that turns $37 billion in revenue…into a half billion dollar loss?

I’m supposed to get excited to buy JD.com stock which carries a $55 billion valuation when it delivered a half billion dollar loss last year?

That is simply nuts.

The Hidden Secret

Here’s the other problem. It’s something nobody talks about because nobody actually does business in China. I have a friend who has done business in China. He arranges events over there. He set up a dental conference in Shanghai, a year in advance. Everything was fine until a week before, the bureaucrat in charge of the event suddenly cancelled it. No explanation. My friend lost a fortune and never found out why. And he never will.

Do you know why?

Every day the Chinese government wakes up with one thing on its mind: how to feed, clothe and shelter two billion people. They are terrified of a revolution. So, if someone has a government job, the only thing he cares about is keeping it so he can feed his family, and keep his privileges. For all my friend knows, his the bureaucrat’s boss had a lousy root canal, hates dentists now, so the underling cancelled the conference so as not to anger his boss. Or maybe the government handed out two billion toothbrushes, and the conference might be interpreted as an insult to the president of China.

Nobody knows. And they never will.

China is opaque. It’s a black box.   Investing in any business in China carries such enormous, unquantifiable risk as it is, without investing in a company that is losing tons of money, and may or may not turn a profit one day.

I wouldn’t touch JD stock, and if you own it, I would sell it as fast as you can.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.