I’ve been pounding the table for JD.com Inc(ADR) (NASDAQ:JD) stock for most of the past six months. And while it took a little while, JD stock finally has broken out.
Indeed, JD shares have gained 30% just since early December, after the last time I argued investors should stay patient with the stock. And there is a case, maybe, to take some profits here. JD.com stock isn’t cheap, at over 50x forward EPS estimates.
It’s nearing all-time highs reached back in August. And there’s still a risk that the Chinese economy will slow down at some point, which would have an outsized impact on both JD.com and rival Alibaba Group Holding Ltd (NYSE:BABA).
Still, I don’t think the run for JD stock is over. As Luce Emerson pointed out on this site back in August, JD.com is taking market share from Alibaba. Overall Chinese economic, and e-commerce, growth remains strong. JD stock looks expensive, but isn’t quite as pricey considering near-term investments in the business.
There’s likely to be further volatility ahead in 2018, but from a long-term standpoint I still think JD.com is one of the best growth stories in the market. And that story should drive JD higher this year.
Growth Ahead
The story behind JD stock is a relatively simple one: it’s one of two key e-commerce players in the large and fast-growing Chinese market. And it’s closing the gap relative to Alibaba, as noted above. CEO Richard Liu told CNBC in September that the company expected to pass Alibaba within five years.
If Liu is right, JD likely has huge upside ahead. Alibaba has a market cap of $476 billion. JD.com stock, in turn, is valued at just $62 billion – barely one-eighth that figure. To be sure, Alibaba has a valuable cloud business and a lead in other areas (such as payments). But narrowing that revenue gap will no doubt lead to a narrowing valuation gap as well.
On its own, JD’s growth remains impressive. Revenue has increased 41% year-to-date. And a series of partnerships should drive growth going forward. A deal with Wal-Mart Stores Inc (NYSE:WMT) already is paying dividends.
In-country, JD has teamed up with Tencent Holdings Ltd (OTCMKTS:TCEHY), leveraging that company’s social media user base and data to drive sales. JD.com is even moving offline, planning to open more than 1,000 fresh food stores, according to a recent report.
As such, it’s JD – not Alibaba – that looks like the Amazon.com, Inc. (NASDAQ:AMZN) of China, as Will Healy argued last month. It’s JD, not Alibaba, that owns inventory and has an impressive supply chain built out. And JD, like Amazon, appears to have a long-term strategy that will leverage its edge in e-commerce into a sprawling business and multiple growth opportunities.
JD Stock Isn’t That Expensive
Like AMZN, JD does have some valuation concerns. But in both cases, seemingly high P/E ratios are being impacted by near-term investments to drive growth. Simply judging Amazon stock based on a single metric is short-sighted – and the same is true for JD stock.
But even with those investments, JD earnings have increased this year, and should grow again next year. Street estimates suggest 80% growth in earnings per ADS next year, driven by 30% revenue growth. The average analyst target price is over $50 as well, suggesting another 10% upside from current levels.
In the context of that growth, a forward multiple in the 50x range isn’t nearly as expensive as it sounds. It’s a multiple that JD.com can grow into if the story holds up.
And at the moment, there’s little reason to suggest otherwise. All three earnings reports this year were impressive. The Chinese market has years, if not decades, of growth ahead. Market share gains will only add to those opportunities.
JD might look expensive but it’s a stock worth paying up for. Until that changes, I plan to stay bullish.
As of this writing, Vince Martin has no positions in any securities mentioned.
