I imagine investors in JD.Com Inc(ADR) (NASDAQ:JD) are somewhat frustrated at the moment. JD.com news has been nothing but good — yet JD.com stock hasn’t moved in six months.
I’ll admit the lack of movement in the JD stock price has been a surprise. I thought a September pullback represented an opportunity to get JD.com stock cheap — and yet JD has stayed roughly flat. I predicted JD.com would post a big earnings beat earlier this month, and again recommended the stock heartily. JD earnings crushed consensus — and JD.com stock still hasn’t moved.
But I’m not ready to give up on JD just yet. The stock isn’t cheap by any means, trading at 43x 2018 EPS estimates. I still see some risk to the Chinese economy after two decades of torrid performance. Still, there are few better growth stories in the entire market, and the performance gap between JD stock and that of larger, better-known rival Alibaba Group Holding Ltd (NYSE:BABA) should reverse. At some point, the JD.com stock price is going to move and that move most likely is going to be upward.
JD.Com Earnings
As noted, I predicted a blowout quarter from JD, but the numbers were even better than I thought. Revenue grew 39% year-over-year. Adjusted income per ADS did decline, thanks to investments in the business, but the $0.23 print beat consensus by $0.10.
Below the headline numbers, the performance looks strong as well. Gross merchandise value (GMV) rose in the “low 30s” on a percentage basis, according to the Q3 conference call. Adjusted gross margin hit an all-time record. That’s helpful given that as a pure retailer — with a model much closer to Amazon.com, Inc. (NASDAQ:AMZN) than that of Alibaba — gross margins are going to be on the lower side, relative to most companies.
Marketing spending rose, which the company attributed to efforts to reach smaller cities on the mainland. Free-cash flow was negative, but there too JD.com is investing in the future, in this case in a new headquarters and new warehouses. Meanwhile, Q4 guidance of revenue growth of 35-39% suggests the growth story should remain intact for at least the rest of 2017. And as InvestorPlace columnist Nicolas Chahine pointed out, a strong Singles’ Day performance suggests the quarter is off to a strong start.
JD.com stock did make some gains coming out of the report. But as has been the case for the past six months, it quickly retreated. The obvious question is why.
Risks to JD.Com Stock
Truthfully, it’s tough to tell. Morgan Stanley (NYSE:MS) analysts downgraded the stock to Neutral soon after earnings, with JD stock falling on that news. The brokerage firm pointed to concerning commentary on the Q3 call, in which JD.com management cited “coercive tactics” from competitors (likely Alibaba), which led apparel manufacturers to leave the platform.
But there’s more going on here than a single analyst move. (It’s worth noting that Morgan Stanley still has a $45 price target, which suggests about 19% upside in the stock from current levels.) JD.com stock simply hasn’t gotten the same love as Alibaba. Over the past six months, the JD stock price has fallen 7.7%. BABA has gained some 45%, adding some $140 billion in market capitalization in the process.
Yet from here, JD stock looks like a far better play, given the accounting concerns at Alibaba that fellow InvestorPlace columnist Ian Bezek highlighted just this week. JD stock is more expensive on a P/E basis, but it’s also steadily taken share from its larger rival.
There are risks in JD shares, to be sure. The true strength of the Chinese economy long has been debated. A 43x forward multiple does suggest further downside particularly in a broad market correction.
But this is a market that’s bid up shares in high-growth, high-multiple stocks like AMZN, Nvidia Corporation (NASDAQ:NVDA), and Shopify Inc (US) (NYSE:SHOP). All of those companies have impressive growth stories, to be sure. But so does JD.com. And it’s hard not to feel like JD stock is getting left out of the rally.
JD.com News Should Improve Eventually
This is a story that might take some patience. Chahine recommended selling JD stock coming out of the strong Singles’ Day numbers, and that’s a strategy that might make some sense. A long JD/short BABA trade would tease out broad market and Chinese macro risk as well.
On its own, JD might be due for some volatility. Support has held in the current range — but a further dip from a technical perspective could imply a drop back to the low 30s.
I still think JD.com stock is more than cheap enough below $40 and a price closer to $30 would be a gift. There’s a lot to like here, and more than enough reward to take on potential risk. All that said, after the last few months, investors might be advised to have some patience. The JD.com story is moving forward. But for whatever reason, the market isn’t yet coming along.
As of this writing, Vince Martin has no positions in any securities mentioned.
