One of the big knocks against JD.Com Inc(ADR) (NASDAQ:JD) is that it is the second-place operator in China’s e-commerce market. Of course, the clear leader is Alibaba Group Holding Ltd (NYSE:BABA), which has a market cap of $473 billion, making it one of the world’s most valuable companies. JD stock, on the other hand, is worth about $57 billion.
Yet, comparing both BABA and JD can lead to some misleading conclusions. For example, both companies have different business models. Consider that BABA is an online marketplace, whereas JD generally holds inventory, kind of like what Amazon.com, Inc. (NASDAQ:AMZN) does.
Regardless, it is really a mistake to overlook JD stock. As InvestorPlace’s Vince Martin has noted: “JD.com is #2 in one of the world’s best markets. It’s taking share in that market. It may not catch Alibaba, but its valuation is roughly one-ninth that of its larger rival.”
The latest earnings report certainly highlights this. Revenues jumped by 39% to $12.58 billion and the adjusted earnings came to 23 cents a share. The Street, on the other hand, was looking for revenues of $15.25 billion and earnings of 10 cents a share.
Something else: The consensus price target on JD stock is roughly $50, which implies a 25% return at the current price.
JD Stock Price and the Strategy
Now, interestingly enough, JD.com’s No. 2 position makes the company attractive for partnerships. After all, because BABA is involved in various markets, the firm is definitely viewed as a potential threat.
This helps to explain JD.com’s success in joining with Tencent Holdings Ltd (OTCMKTS:TCHEY). During the latest quarter, both companies expanded their relationship with the rollout of a new marketing solution. It involves leveraging Tencent’s extensive social media and messaging data to better target e-commerce opportunities.
But JD.com has important deals with other notable Chinese operators like Baidu Inc (ADR)(NASDAQ:BIDU), NetEase Inc (ADR) (NASDAQ:NTES), Qihoo 360 Technology Co Ltd (NYSE:QIHU) and Sogou Inc (NYSE:SOGO) too.
Besides partnerships, another key advantage for JD stock is the company’s infrastructure, which includes a nationwide fulfillment infrastructure and a last-mile delivery network. There are 405 warehouses and nearly 7,000 delivery/pickup stations. And, yes, JD.com has pushed innovation as well. Note that the company created an unmanned sortation center and has put together a drone network that is considered to be the largest in China.
As a result, JD.com can provide top-notch service and fast deliveries. But brands are also comfortable with the platform, as counterfeits are less likely. For example, during the latest quarter, the company expanded relationships with fashion brands like Armani, DYSON and La Perla. According to JD.com’s CEO Richard Liu: “We are achieving our mission of bringing China’s consumers the widest selection of top brands and, by far, the highest quality e-commerce experience.”
Bottom Line on JD Stock
Some other good JD.com news came from Single’s Day in China, where the company raked in an impressive $19.1 billion in sales, up 50% on a year-over-year basis.
It’s certainly a big-time validation of the strength of the Chinese market — and how quick e-commerce is being adopted. Based on research from Goldman Sachs Group Inc (NYSE:GS), the market for online sales is forecast to jump from $750 billion in 2016 to $1.7 trillion by 2020.
And, yes, while BABA represents major competition, there is certainly lots of room for other players. In fact, AMZN has mostly opted out of the Chinese market. So, for the most part, the lion’s share of the e-commerce opportunity is likely to be divided between BABA and JD.
All in all, this is a pretty good position and should allow for solid long-term returns in JD stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.