Investors were a little unhappy about the JD.Com Inc (ADR) (NASDAQ:JD) Q4 2017 earnings report, dropping JD.com stock about 10% since the Mar. 2 release date.
It seems investors didn’t like the amount of money the company lost in the quarter — $143 million compared to the analyst estimate of $82 million — nor did they take much comfort in the company’s guidance for non-GAAP net margins of 1%-2% in 2018.
Get over it.
Let’s Take a Walk Down Memory Lane
At the end of January, I looked at nine years of financial data of both JD.com and Amazon.com, Inc. (NASDAQ:AMZN) at the same point in each company’s history.
What was clear to me is that JD.com is actually growing faster than Amazon was in its growth spurt.
Sure, its lack of profit does leave you a little uneasy, but like Jeff Bezos, who believed you put the pedal to the medal sacrificing profits for growth, JD.com is doing the same thing taking a page right out of the Amazon playbook.
“We’re still in the very early stage of a very long-term growth trajectory so our focus must be on growth and we have also made a very intentional effort to reinvest part of the profitability back in the business,” said CFO Sidney Huang.
Free Cash Flow Matters
InvestorPlace contributor Ian Bezek recently made his case why the dip in JD.com stock is nothing more than a flesh wound. His argument is eerily similar to mine.
Bezek focuses on cash flow and suggests that while the company doesn’t have big profits, even by non-GAAP standards, it does generate more than $2 billion in free cash flow annually. I expect that to continue to grow as sales increase.
Free cash flow is king.
Because his article was published first, should JD stock go through the roof in 2018, he deserves all the credit. I’m just along for the ride.
Amazon’s Past
As I tried to demonstrate in my Jan. 29 article, perhaps clumsily, it helps to understand Amazon’s history to better get a handle on what’s happening at JD.com.
So, let’s go back to 2009 and have a look at Amazon’s fiscal results compared to JD.com in 2017.
Note: I use 2009 because that’s 14 years into Amazon’s launch. JD.com started selling online in 2003, so 2017 is 14 years since it launched the business that exists today.
In 2009, Amazon had $24.5 billion in revenue and $2.9 billion in free cash flow. In 2017, JD.com had $55.7 billion in revenue and free cash flow of $2.4 billion.
So, from the perspective of free cash flow margins — Amazon is at 11.8%, which is 750 basis points higher than JD.com — it would appear that JD.com isn’t doing as well as Amazon at the same point in its history.
Perhaps.
But take a look at the revenue growth of the two companies. In 2009, Amazon’s revenues increased 27.6%, and last year JD.com’s increased by 40.3%. You need to consider what the future might look like if JD.com keeps up its pace of growth.
Bottom Line on JD.com Stock
Except for the elephant in the room — Chinese stocks having questionable accounting practices, poor corporate governance, etc. — I don’t see anything from JD.com’s Q4 2017 earnings release that should cause investors to lose any sleep.
Right now, JD.com has the opportunity to be bigger than Amazon, but a lot has to go right for that to happen, not the least of which is beating Amazon on its own turf.
I don’t know if that will happen, but good things come to those who think big.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
