Some who are reading this article may not know the name JD.com Inc (ADR) (NASDAQ:JD). Most Americans who think of online retail in China only know of Alibaba Group Holding Ltd (NYSE:BABA). Despite this name recognition, Alibaba serves only as a middleman. It does not own products or maintain a vast logistics infrastructure.
Alibaba more closely resembles online auction site eBay Inc (NASDAQ:EBAY) than Amazon.com, Inc. (NASDAQ:AMZN). Like Amazon, JD buys products and owns the warehouses. For investors who missed the chance to buy Amazon early, JD stock provides investors another chance to profit from the rise of e-commerce.
JD Must Overcome Issues Such As the “Alibaba Problem”
To be sure, the company suffers from what my colleague Chris Fraley calls an “Alibaba problem.” I argued in an earlier article that the public should regard JD, and not Alibaba, as the “Amazon of China.” Despite the company’s closer to resemblance to Amazon, Alibaba remains the better-known Chinese online retailer outside of China. JD needs to solve this problem, as becoming better known is critical to growing the company and JD stock.
Another problem, that our own Lawrence Meyers pointed out, is that the Chinese government serves as an X-factor in doing business in China. Technically, the government can shut down a business for any reason. Such a move would hit JD stock hard. Still, scaring investors in such a way would destroy trillions of dollars in wealth. For this reason, I doubt that such a shutdown would happen.
Also, so far, China’s government protection has served the interests of home-grown firms at the expense of American technology giants. When searching, Chinese users log on to Baidu Inc (ADR) (NASDAQ:BIDU) instead of Google, managed by its parent Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). For social media, the Chinese people turn to Weibo Corp (ADR) (NASDAQ:WB) instead of Facebook Inc (NASDAQ:FB). If one can manage this risk, investors can profit when these same Chinese consumers turn to JD instead of Amazon.
JD Beats Amazon on Both Revenue Growth and Valuation
JD has grown its revenue by an average of 65% per year over the last five years. Amazon had a revenue growth rate of 23% during the same period. Moreover, after years of losses, analysts expect the company to turn a profit this year. Consensus estimates for annual profits amount to 32 cents per share for fiscal 2018 and 49 cents per share the next fiscal year, or just above 50%.
Interestingly, estimates of earnings growth for Amazon in 2019 approach 75% per year. Despite Amazon’s higher predicted profit growth, JD provides a huge valuation advantage to new buyers. Amazon currently trades at a forward price-to-earnings (PE) ratio of about 143. As JD becomes profitable, investors expect a multiple of 51 for the same period. In other words, choosing AMZN means paying triple for 50% higher earnings.
Moreover, in the next decade, demographics appear to give JD the growth advantage. China’s population stands at around 1.4 billion — more than four times that of the United States. The Chinese people continue to make huge strides in entering the middle class. With its presence throughout China, JD is well-positioned to profit from this growth. Although Amazon’s growth has impressed Wall Street, it sells mostly in slow-growth, developed markets that will not enjoy as high of a growth level.
Bottom Line on JD Stock
For investors who feel like they missed out on e-commerce by not buying Amazon early, JD.com stock provides a second chance.
Investing in China comes with some risk; however, with Alibaba now enjoying most of the name recognition, JD.com has the opportunity to increase its brand awareness. Once the company becomes better known, more investors will recognize that JD.com bears a closer resemblance to Amazon than Alibaba does.
Moreover, as China continues its transition from a developing to a developed nation, its consumers will grow wealthier. With its leadership in e-commerce, the company will attract more of that wealth. By contrast, Amazon operates mostly in countries that will grow their incomes more slowly.
Given JD’s much lower valuation compared to Amazon — and China’s growth potential — buying JD stock gives investors a second chance to profit from the growth of e-commerce.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
