JD.com (NASDAQ:JD) is really nothing like Alibaba Group Holding (NASDAQ:BABA), with which it’s so often compared. And given the difficulty of JD’s endeavors, it will likely be awhile before JD stock rallies, but it could ultimately reward investors quite handsomely.
The centerpiece of Alibaba has always been electronic logistics that connect producers of goods with stores and, now, end buyers. The centerpiece of JD.com has always been delivering goods to consumers, no matter where they are.
JD.com has the tougher task, but when the company succeeds, it could be rewarded very well and JD stock could rally. Because with its system of fulfillment warehouses and delivery centers, JD can potentially make money serving the tiniest hamlets of China. It’s a model that could be exported to many more people than Alibaba’s model, or even that of Amazon.com. (NASDAQ:AMZN).
Still, JD stock was punished recently for missing on earnings, as it had a per share loss of 23 cents on revenues of $18.5 billion. The stock initially lost $1 per share on this news, falling below $32, but within a few days JD stock recovered most of the loss, as the company’s year-over-year growth came in at 31%.
What JD Is Doing
The problem, as JD’s managers explained on its earnings call, lies in the cost of reaching a rural population that still totals 589 million, most of whom can only be profitably served by drones, and tight urban spaces where it is using unmanned minicars.
This logistical innovation will, CEO Liu Qiangdong insists, eventually drop delivery costs to 70% below what rivals pay and run both ways, allowing local farmers to serve urban markets faster than with trucks.
It’s also true that more of the world is like rural China than it is like urban China. Once the model is proven, JD.com should be able to set up shop in Africa, India, Southeast Asia or Latin America profitably, making the whole world accessible to two-way e-commerce. Of course, such an expansion could be quite profitable for JD.com and may boost JD stock significantly.
What the Market Sees
What the market sees, however, is a company that is finding scaling difficult, with its costs increasing as its sales grow. But that’s just what Amazon went through, for years, as it developed its electronic infrastructure, and it had delivery partners like FedEx (NYSE:FDX), United Parcel Service (NYSE:UPS), and the U.S. Postal Service to handle the last-mile. JD is dealing with much of that itself.
But consumer products companies now recognize the value of JD’s infrastructure. Unilever (NYSE:UL) is just the latest to utilize JD’s logistics system, replacing Deutsche Post (OTCMKTS:DPSGY) with JD as its delivery service in China because JD provides next-day delivery to 90% of China’s people.
Thus, JD.com has a different “special sauce” than Alibaba and is building a moat that should be more secure from competition. But that moat is more difficult to build than anything its e-commerce rivals are attempting and it doesn;t get much publicity. Instead, reporters talk about the “Chinese dog vs. cat war,” because JD.com has a dog as a mascot and Alibaba uses a cat as a mascot, and Alibaba is trying very hard, through visibility on its platform, to keep big American companies from seeing the value that JD can give them.
Or reporters talk about how JD.com is building a blockchain platform to track goods, using its delivery infrastructure. The company’s obsession with saving money on getting things to people, rather than an effort to get rural Chinese citizens to adopt Bitcoin, is driving its blockchain experiment,
The Bottom Line on JD Stock
Once you understand what JD.com is and isn’t, you can make a more educated bet on this company. JD stock has a market cap of $47.8 billion, which, at 83% of its annual sales, is high for a retailer. But its forward price-earnings ratio is just 33 and, once its earnings start flowing, they’ll be sustainable.
Our Luke Lango wrote a month ago that JD stock could soar over $50 and he may be right. But you’re going to have to wait for JD’s rally because delivering goods quickly is harder than moving around computer bits.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and AMZN.