Despite Recent Fall, JD.Com Inc (ADR) Stock Is a Long-Term Buy's latest earnings report disappointed, but the e-commerce opportunity in China is huge

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor Stock Is Looking More Like Amazon Every Day

Source: Daniel Cukier via Flickr

Since late January, JD.Com Inc (ADR) (NASDAQ:JD) has gone down nearly 15%.

So what’s going on? Well, there are a variety of reasons. For example, President Trump’s recent move on trade has been a factor. Let’s face it, he believes that China has been a big-time violator of the rules, such as by dumping products and protecting domestic industries.

But another catalyst for the fall in stock is its latest earnings report. While its revenues jumped by 38.87%, at $16.90 billion, they were still below the consensus of $17.09 billion. And as for the bottom line, it was also a disappointment. Profits came in at five cents a share, which was below the Wall Street average consensus of seven cents a share.

Keep in mind that the company has been aggressively boosting its expenses, such as with R&D and marketing. The effort is all about taking on the mighty Alibaba Group Holding Ltd (NYSE:BABA), which sports a market value of $465 billion. stock, on the other hand, has a value of $61 billion.

Despite all this, I think the company is making the right moves. The investments should provide for long-term sustainable growth. All in all, JD stock does look like an attractive opportunity right now.

JD Stock and the Battle With BABA

The fight against BABA does look kind of scary. How can JD really compete?

Granted, in light of the company’s size, it will not be easy. But then again, JD has been smart to partner with Tencent Holdings Ltd (OTCMKTS:TCEHY). Tencent operates the largest messaging app in China — called WeChat — that has 980 million MAUs (monthly active users).

Note that Tencent has a 20% equity stake in JD, which has led to the integration of e-commerce features in the WeChat app. There is also an online payments system that allows for much more convenience for users.

But the Tencent-JD combo has also involved an aggressive strategy to invest in other companies, such as Wanda Commercial Properties Co. (the largest mall operator in China), Better Life (the owner of 400 retail stores) and Vipshop Holdings Ltd – ADR (NYSE:VIPS), which is an online retailer of discount brands.

All these deals are part of an ambitious plan to create an online-to-offline (O2O) platform.

Of course, JD has other notable partners, which should help. Just some include Baidu Inc (ADR)(NASDAQ:BIDU), Sogou Inc (NYSE:SOGO) and even Walmart Inc (NYSE:WMT).

Bottom Line on Stock

While BABA is the dominant player in e-commerce in China, JD still has an enormous business. Consider the following:

– Annual active customer accounts are at 292.5 million, up 29.1% on a year-over-year basis.

– The average number of purchases per active customer is 25.7.

– JD has a massive logistics and supply chain system, which includes 486 warehouses. In fact, the company has been pioneering in using unmanned warehouses, self-driving vehicles, IoT (Internet-of-Things) and robotics.

And yes, China remains a major opportunity for e-commerce growth. According to research from Goldman Sachs Group Inc (NYSE:GS), the market is projected to rise from $750 billion in 2016 to $1.7 trillion by 2020. This means that the online penetration should go from 16% to 22%-25%.

True, stock is not cheap, even with the recent drop. Consider that the forward price-to-earnings ratio is at 31X. But then again, in light of the growth prospects, the shares definitely deserve a premium. And more importantly, the partnership strategy is likely to mean that the company can continue to get an out-sized share of the e-commerce opportunity.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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