Why JD.Com Inc(ADR) Stock Deserves To Trade Above $45

Advertisement

Chinese e-commerce giant JD.Com Inc(ADR) (NASDAQ:JD) reported blowout third-quarter results on Monday. Revenues and earnings both topped expectations. The revenue guide also came in above expectations. It was a very strong quarter that sent JD stock up more than 3%.

Why JD.Com Inc(ADR) Stock Deserves To Trade Above $45

But JD stock gave up all those gains and then some on Tuesday. Most analysts boosted their price targets following the strong Q3 report, citing sustained top-line momentum and an acceleration in the margin growth narrative.

Morgan Stanley, though, cut its price target on JD stock to $45 from $53. Analysts there think the margin expansion narrative is promising, but cite elevated competition in apparel as well as a full valuation as reasons not to buy the stock.

JD stock fell hard and it now languishes at $38, lower then where it was prior to the blowout report.

Does that make sense? Not really. JD stock is a powerful growth story with lots of room to run thanks to a booming digital retail sales scene in China.

All else equal, I think JD stock deserves to trade above $45. Here’s how I get there.

Huge Market Opportunity

JD.Com’s market opportunity is quite large.

Thanks to a booming middle class, China’s retail market is growing at a rather robust 12% per year. Moreover, most of the growth in retail is concentrated in the digital channel, which has increased its penetration rate from 6.2% in 2012 to 14% today.

This combination of growing digital share against a booming retail backdrop has led to digital sales surging more than 40% per year over the past several years. This robust growth is expected to continue. Digital sales growth in China into 2019 is expected to be 16% per year.

But JD’s revenue growth consistently outpaces the market growth rate. Why? Because the Chinese retail market is consolidating. Right now, the top 20 retailers in China control only 12% market share. In the United States, the top 20 control 45% market share.

As the Chinese retail landscape starts to look more like the American retail landscape, big retailers will win due to market consolidation. As it turns out, JD.Com is not only the biggest retailer in China, but also the fastest growing notable retailer.

JD.Com Growth Will Impress

JD.Com’s Chinese retail market share will grow dramatically over the next several years with the expected consolidation. That means JD’s revenue growth rate over the next several years will be far above 16%.

 

I think its reasonable to assume JD grows revenues around 25% per year over the next 5 years. That would put revenues somewhere around $165 billion in five years.

JD’s margins are also exploding higher due to scale. I think its also reasonable to assume that net profit margins hit 5% in 5 years (versus 2% so far in 2017). That would put net profits at $8.25 billion in 5 years, or about $2.75 per share (assuming 3 billion diluted share count).

At that point in time, JD.Com should look a lot like a faster growing Wal-Mart Stores Inc (NYSE:WMT). WMT stock is trading at 22x trailing earnings. JD.com in five years, then, easily deserves a 25x-30x multiple. Call it 27.5. A 27.5x multiple on $2.75 earnings implies a five-year price target of about $75.

Discount that back by 10% per year. You get to a present value of about $47.

Bottom Line on JD Stock

JD stock is dramatically undervalued here given the huge market opportunity and robust margin expansion potential.

This sell-off feels like an overreaction. I’m buying JD stock on this dip and holding for the long-term.

As of this writing, Luke Lango was long JD. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/jd-com-stock-deserves-trade-around-45/.

©2024 InvestorPlace Media, LLC