On Friday morning, JD.com Inc(ADR) (NASDAQ:JD) will release its fourth-quarter earnings. JD stock has gained almost 12% so far this year — and about 30% since bouncing off December lows. For the rally in JD.com stock to continue, Q4 numbers are going to have to impress.
But there’s more than just short-term moves at stake on Friday. The JD.com story is based in large part on the company taking share from rival Alibaba Group Holding Ltd (NYSE:BABA). Those share gains aren’t just a matter of winning the battle for e-commerce sales. JD.com is heading into the grocery store market. Along with Alibaba, it’s expanding into Western markets.
Unlike Alibaba, it’s building out its logistics business, with plans for a potential IPO in Hong Kong on the way.
So JD.com’s Q4 report isn’t just going to be about the headline numbers. And the post-earnings move in JD stock isn’t going to be driven solely by traders. Investors are going to want to see that the company kept winning in Q4 – and that it’s properly laying the groundwork to keep winning in 2018 and beyond. If JD.com can drive that confidence, JD stock has the potential for a big move on Friday.
JD.com Stock and the Numbers
The Street is looking for a reasonably big quarter from JD.com. Consensus estimates suggest modest earnings growth, with EPS projected to rise a penny year-over-year to 7 cents. But that modest growth is coming due to the myriad investments in the JD business. Revenue, meanwhile, is expected to increase 35% against Q4 2016 levels.
It’s the revenue figure that likely will be closely watched. Because JD is building out its logistics business and expanding its offline operations, investors generally are willing to give the company a pass in terms of earnings – for now. (As many analysts have pointed out, the supply chain capabilities mean JD’s model is much closer to Amazon.com, Inc. (NASDAQ:AMZN) than that of Alibaba, which doesn’t hold inventory.)
Those investments need to pay off in terms of sales. Alibaba grew revenue 56% in its December quarter. JD isn’t going to, and doesn’t need to, post the same growth, as it doesn’t play in all of the same areas as Alibaba. (Most notably, Alibaba has a fast-growing cloud business.) But if JD.com is spending more on its business (on a relative basis), and posts what is perceived as weaker growth, that’s a combination that could spook investors.
The good news is that JD.com hasn’t missed on revenue since its Q1 2016 report. The potentially bad news is that even a beat hasn’t always moved JD.com stock higher after earnings. That could be the case on Friday as well.
The Long-Term Case for JD Stock
Traders may react to the headline numbers on Friday. But long-term investors should have a lot to digest as well.
Again, JD.com has a lot of balls in the air at the moment. As Barron’s detailed this week, a U.S. entry seems imminent. Reports have circulated that Alibaba is looking to enter the U.S., potentially through a partnership with Kroger Co (NYSE:KR). JD.com could follow, possibly in concert with Walmart Inc (NYSE:WMT), with whom the company already has a relationship in China.
With so many efforts going on — grocery stores, Western expansion, supply chain investments, etc. — there will be a lot to discuss on the Q4 conference call. And the ability of JD.com management to inspire confidence on those fronts will have a huge impact on JD.com stock.
There are two obvious, yet diverging, paths for JD stock coming out of Friday’s report. Strong numbers and a coherent strategy could make JD stock the AMZN of China, too. If investors believe in the growth potential, they will give the company leeway to spend to achieve that growth, as they have with Amazon. And with JD.com stock valued at about one-seventh that of Alibaba on a market cap basis, that creates huge upside potential.
But if JD stumbles, there’s plenty of room to fall. JD was trading at $36 less than three months ago. The forward P/E multiple here still sits over 50x. This can get ugly in a hurry.
I’ve been bullish on JD stock, most recently recommending it in January at basically the same levels at which it trades today. I’m still bullish — long-term. But in the near-term, I’d watch out for some fireworks.
As of this writing, Vince Martin has no positions in any securities mentioned.