The Dip in JD.Com Inc(ADR) Stock Is Just a Flesh Wound

Despite a soft quarter, the investment case for stock remains compelling

By Ian Bezek, InvestorPlace Contributor Stock Is Looking More Like Amazon Every Day

Source: Daniel Cukier via Flickr

JD.Com Inc(ADR) (NASDAQ:JD) disappointed investors with its most recent quarterly report, causing traders to drop stock about 10% lower on the news. It’s not hard to see why. The company came up short of earnings estimates, and revenues fell short of more optimistic analysts’ outlooks.

And now, the stock is down more than 4% in early morning trading, as the reports have surfaced that Tybourne Capital Management has significantly reduced its stake in JD stock (a reduction of more than 62%).

However, the market’s reaction to its earnings slump is overblown.

Management has consistently indicated that it doesn’t care about short-term earnings numbers. As such, it’s more fair to judge the company on how well it is building its retail and logistics empire. And on that front, the story remains intact. To see why, let’s start with an important distinction: the difference between earnings and cash flow. Stock: Risky But Not Ridiculous

InvestorPlace contributor Lawrence Meyers recently suggested that stock should be avoided. He started off with this provocative claim: the company “has numbers that look good on the surface, but when you get to the numbers that really matter, JD stock is a ridiculous investment.”

Meyers continues, explaining how still loses money despite its growing sales. And he certainly has a good point: JD doesn’t generate large consistent profits. Even on a friendlier non-GAAP basis, the company doesn’t produce significant earnings in most quarters.

Meyers grants that is cash flow positive, but suggests that a company with nearly as many active users as the American population should also generate noteworthy profits.

This isn’t necessarily wrong. Many investors won’t touch stocks that aren’t currently generating profits. Every investment you make should match your risk profile and investment goals. If currently unprofitable companies don’t meet your standards, there’s nothing wrong with avoiding them.

Cash Flow Counts

However, has made no effort to hide the fact that it is closely following the business model of, Inc. (NASDAQ:AMZN). For many years, Amazon generated operating losses, or at best, reported tiny profits. However, Amazon managed its cash flow well, and as a result, it never had to significantly dilute shareholders or take on too much debt.

Amazon isn’t the only company doing this., Inc. (NYSE:CRM) is another classic example of growth now to build a monopoly business and earn fat profits later. JD is using the same approach.

In the past year, generated more than $2 billion in free cash flow. That’s the real figure to watch, since JD needs cash to keep expanding and fighting the good fight against Alibaba Group Holding Ltd (NYSE:BABA) and other Chinese competition. As long as generates a substantial pile of cash, it can keep operating as it is currently doing.

Sure, it’d be nice if JD produced large operating profits as well, allowing it to pay dividends or buy back stock. But the company is still young and is in an intense battle for market share. If there was ever a time to prioritize growth over current profits, it would be now.

Many skeptics laughed at Amazon’s business model. But they missed the fact that Amazon was building a nearly impenetrable moat. is attempting the same thing. It may not succeed. But if it does, the company’s market cap will be many multiples of today’s $65-billion market cap. Alibaba, for comparison’s sake, is currently worth almost eight times that figure.

Did JD Grow Fast Enough? stock didn’t just sell off because of disappointing earnings. In fact, JD’s management has previously stated that it will invest more money in growing the business whenever earnings-per-share starts to rise. After a solid EPS beat last quarter, it shouldn’t be surprising that the company allowed earnings to decline this quarter. In fact, this probably occurred by design.

That said, the company’s 39% revenue growth rate also disappointed investors. The company historically has been running revenue growth in the 40s, so a number starting with a three isn’t the most upbeat. To be fair to the company, it gets exponentially harder to maintain that high of a growth rate as your base sales number keeps rising.

Still, analysts had expected to keep in the 40% growth range a little longer, and the company risks falling off the pace against Alibaba if it doesn’t grow slightly faster going forward.

JD has all sorts of expansion plans. It’s currently making moves across Southeast Asia and it has suggested that it will move into the United States and Europe sooner or later.

Given the large ownership position of Walmart Inc (NYSE:WMT) in, that seems reasonable. For now, though, I’d rather the company focus on growth that produces more free cash flow, rather than just expanding the revenue number by sacrificing margins. Stock’s Investment Case Hasn’t Changed

Wall Street will continue to overreact to earnings. So much of the analyst game is based around trying to guess next quarter’s numbers. But isn’t about that. Its management has repeatedly said it isn’t trying to hit quarterly numbers. Instead, it’s building the business for the long haul.

With that sort of attitude, we should expect a fair number of earnings misses over the years. Management isn’t working with the beat-by-a-penny-every-quarter model.

Rather than focusing on short-term fluctuations in numbers — particularly the largely irrelevant EPS figure — instead analyze’s competitive position. I own stock because it has better logistics than Alibaba, and its business model is ultimately more attractive.

Alibaba is much closer to the eBay Inc (NASDAQ:EBAY) of China than its Amazon. And while eBay and PayPal Holdings Inc (NASDAQ:PYPL) are great companies, the real money comes in being a credible seller of high-quality merchandise á la Amazon, not just operating as a middleman for other merchants.

Bottom Line for Stock

If’s market share and growth rate drop sharply in China, I’ll reconsider my thesis for the stock. But nothing in this earnings report suggested that JD’s business model is struggling or that management has lost sight of the way forward.

As a result, the latest dip in JD stock is a solid opportunity to get into this compelling long-term growth story. If is even half as successful as Amazon has been, its market cap of $65 billion could easily move into Alibaba territory over the next decade, making the stock a near 10-bagger.

At the time of this writing, the author held JD stock and had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.

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