On August 16th before the open, JD.com (NASDAQ:JD) will report its second-quarter earnings. The company’s shares have not traded well since peaking in June. Will its Q2 results help propel JD stock higher?
That’s definitely what the bulls are hoping, as the stock is trading just above its critical support level. Worries about the Chinese-U.S. trade relationship have kept a lid on names like JD and Alibaba (NYSE:BABA), even though both of those companies continue to do well. It doesn’t help when other Chinese companies, like Baidu (NASDAQ:BIDU), are struggling as well.
Going into Thursday, analysts expect JD to report earnings of 10 cents per share, flat compared with a year ago. On the sales front, though, JD is expected to generate significant growth. The consensus estimate calls for $17.8 billion in sales, up almost 31% year-over-year from $13.6 billion.
JD stock was riding high earlier this year, as the company had beaten earnings and revenue estimates for four straight quarters coming into its fiscal fourth quarter. However, its Q4 top and bottom lines, reported in March, both missed expectations. JD.com’s Q1 earnings per share also came in below the consensus estimate, as its costs continued to rise. Over the last month or so, estimates for the company’s Q2 results have fallen a bit, which should make the hurdles easier to clear.
Valuing JD Stock
For the full-year, analysts expect JD’s EPS to come in at 62 cents, up 24% YOY. In 2019, though, they are looking for earnings growth of 74%, which would bring JD’s EPS to $1.08. On the revenue front, they expect 30% growth in 2018 and 26% growth in 2019.
Those are pretty impressive targets, even if JD stock does trade at 54 times this year’s earnings estimates. However, JD stock trades at “just” 31 times next year’s estimates. Given its sales growth of more than 25% and its strong earnings growth, one could make a case that the shares aren’t expensive.
Earnings, however, may not be the best instrument to use for valuing JD stock. Clearly, the company’s management is investing in the future, rather than maximizing its bottom line. Companies like Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) have followed similar strategies.
While JD has a $48 billion market cap, keep in mind that it will generate almost $70 billion in sales this year. Given the scope of the Chinese e-commerce market, I’m wondering if JD stock should be worth more.
As of the most recent quarter, JD had 35.2 billion yuan in cash ($5.1 billion) and no longer carried short-term debt. As for long-term debt, it’s down almost 50% to roughly 7.2 billion yuan (about $1 billion).
Over the last few months, all four analysts who have written reports on JD stock have given the shares buy ratings. Their price targets range between $50 and $53, giving us an average target price of $51.25, which implies more than 50% upside. Wow. And remember, that’s not just one, way-too-optimistic estimate from a lone analyst; several analysts are suggesting that the stock can rally a great deal.
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So should we buy JD stock? If investors really like the company’s long-term outlook, they can consider initiating a position in the name ahead of its earnings. If the shares retreat after the company announces its results, we can consider buying more stock on the dip. If the reaction is bullish, we can either ride higher with what we have or consider adding to our position.
But JD stock has been a complete dog lately. The shares reached new 52-week lows today, and the stock looks as sick as ever. Granted, Chinese stocks are not trading well on the day, with Huya (NYSE:HUYA) tumbling lower and dragging names like iQiyi (NASDAQ:IQ) and Sogou (NYSE:SOGO) down, too.
As if the new lows weren’t bad enough, JD is breaking below key support (see the chart above). I don’t typically bold my text, but I can’t emphasize enough how vital this level is. The gap (represented by the higher dashed line) is no longer acting as support, and if JD can’t get above trend support, I will be worried about its technical outlook.
If the shares rebound after the company reports its earnings, look to see how it handles that gap level, which is near $36. If JD stock falls following its earnings, let’s see if it can get down to $30. If it does, it’s likely worth a shot on the long side.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
