It isn’t that the stock market is 30% overvalued and at its second most expensive in history that concerns me about JD.Com Inc(ADR) (NASDAQ:JD). Yes, my concern is directly linked to the ridiculous valuation JD.com stock has been assigned. Yet that concern is exponentially compounded by the fact that JD.com is a Chinese company.
I’m not suggesting that all Chinese companies are loaded with corruption, although that is the case with some. I’m just saying that owning a company in a foreign country carries additional risk, and in the case of China, it carries enormous risk that nobody really accounts for.
I’ve written it before, and I will repeat it every time I write about a Chinese company, because it is central to any investment decision process for these stocks:
A friend of mine books events in China. He set up a dental convention there and had zero problems until just a few days before the whole thing went down. Suddenly, the government worker he liaisoned with cancelled the whole thing. My friend was on the hook to refund hundreds of thousands of dollars and was never given a reason why the cancellation occurred.
The deal is that every single day the Chinese government has to focus on how to feed, clothe and shelter over a billion people. It fears a revolution, and if some bureaucrat has a cushy job and privileges, he’ll do whatever is necessary to keep his boat afloat.
There could be a million different reasons why the event was cancelled, and my friend will never know why. Nobody will. Ever.
China is a black box. You have no control over what will happen, so if you invest in a business over there, you’re taking on massive risk.
What drives JD.com stock? It’s an online marketplace for generalized merchandise, along with appliances, mobile handsets, electronics and auto parts. That marketplace offers transaction processing, billing, marketing and fulfillment services, and even some financing options.
I will admit that JD.com has something Amazon does not, and which is necessary for a country the size of China. It has more than 7,000 places where items can be delivered from and a massive footprint of 250 warehouses.
Yes, I will also admit that e-commerce is huge in China. Of those aforementioned more than a billion citizens, about a quarter of them bought something online last year, and JD.com has about a 7% market share. So there’s lots of room to grow.
Bottom Line on JD.com Stock
But I don’t care if JD.com is the cross-pollinated stepchild of Amazon.com, Inc. (NASDAQ:AMZN), eBay Inc (NASDAQ:EBAY) and Alibaba Group Holding Ltd (NYSE:BABA). I’m not buying it, and I don’t care how high JD.com stock goes.
Look, on top of the huge issues I mentioned about operating in China, and despite this rather large consumer base, JD.com is losing tons of money. Despite lapping up some $38 billion in revenue, the darn company is still losing $550 million per year. Sure, that’s down from $2 billion, but there is no way JD.com is worth $65 billion!
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
