It would seem like good news for JD.com Inc(ADR) (NASDAQ:JD) that Alphabet Inc (NASDAQ:GOOGL,GOOG) is investing in the company. But after an initial pop on the news, JD stock pulled back and actually closed down 6%+ for the week.
And so the roller coaster in JD.com stock continues. JD stock actually is down about 1.5% over the past twelve months but has traded between $34 and $51 over that time frame.
I’ve stayed bullish on JD throughout that period, and I still think JD.com will provide strong returns at some point. If anything, the Google deal only adds to the bull case for JD stock even if investors don’t seem to agree at the moment.
The Google Deal
Google is acquiring a bit over 27 million Class A shares from JD.com. Alphabet is paying $40.58 per ADS (each ADS is equal to two shares), a discount to the price when the deal was announced, but essentially in line with Friday’s close of $40.82.
In the context of a $59 billion market cap, it’s not a massive investment: Google still will own less than 1% of the company.
JD.com will get more cash needed to build out its logistics capabilities and apparently to finance its expansion into Asia.
The press release cites a focus on markets outside of China: Southeast Asia, Europe, and the U.S. With JD.com apparently set to expand into Thailand rather soon, Southeast Asia seems like the logical first target.
Google and JD.com will work together on unspecified initiatives, combining Google’s technology with JD’s existing infrastructure. JD.com also will sell through Google Shopping in “multiple regions,” according to the release.
To be sure, there’s a risk of bulls overreacting to the deal somewhat. This isn’t necessarily a game-changer for JD stock. The Google partnership doesn’t appear to have any pull in China, still JD.com’s key market.
A less than 1% stake for Google doesn’t imply that Alphabet is setting itself up to acquire the entire company at some point in the near future. But there are a number of reasons why the Google deal should be (and is) good news for JD stock.
Why the Deal Is Good News
First, there’s some validation of the JD.com business model in the investment. $550 million might not be a lot to Alphabet, which has a market cap over $800 billion.
But the size of the investment certainly suggests at least some due diligence. JD bears, notably a major hedge fund in Singapore, have argued that JD.com’s core model is essentially unprofitable.
Google’s investment would seem to suggest that the tech behemoth believes otherwise.
Indeed, Alphabet adds to an impressive list of giants now backing JD.com. Tencent Holding/ADR (OTCMKTS:TCEHY) owns a 15% stake in JD. JD has a partnership with Walmart Inc (NYSE:WMT) for its brick-and-mortar operations.
Wall Street remains firmly behind the stock as well, with nearly all analysts holding bullish ratings and the average target price at $48.
Secondly, it gives JD a potential edge in key growth markets. China is a huge market, but it’s also one where JD is battling Alibaba Group Holding Ltd (NYSE:BABA) and myriad other rivals.
Alibaba has a clear edge in-country, albeit with a different business model. A partnership with Google could accelerate share gains in smaller markets where Alibaba’s first-mover advantage isn’t quite as pronounced.
And it could help JD.com grow into what is still a steep valuation, at least in terms of earnings.
Why Did JD Stock Sell Off?
If the Google deal is a good one, why did JD stock sell off? The most likely answer is that the market is concerned about a potential trade war between the U.S. and China. But this also has been a volatile stock, and a company that simply hasn’t been able to drive consistent earnings as its revenue has grown.
I still think patience will pay off here. As I (and many others) have noted, it’s JD, not Alibaba, that truly is the Amazon.com, Inc. (NASDAQ:AMZN) of China. And like at Amazon, near-term earnings are being impacted by the company’s investment in long-term capabilities.
The market has given Amazon credit for that spend but doesn’t seem to be as willing to do so with JD.com. But given that giants like Tencent, Walmart, and now Alphabet see real returns coming on those investments, individual investors should do the same.
As of this writing, Vince Martin has no positions in any securities mentioned.