JD.com Has Potential, But It’s Not Attractive Just Yet

JD stock isn't a great contrarian play right now because it's facing too many headwinds

The JD.com Stock Head-Fake This Month Probably Won’t Last

Source: Daniel Cukier via Flickr

It’s been a tough month for Chinese stocks, particularly e-commerce company JD.com (NASDAQ:JD). Not only has JD seen its share price beaten down by trade tension between the U.S. and China, but the company’s second-quarter results came in below expectations and caused sentiment towards JD stock to sink even lower. JD is down nearly 40% from where it was just six months ago, which is sure to pique contrarians’ interest. However, the company is facing some very real headwinds that are likely to keep the share price depressed through the end of the year, so you might not want to jump in with both feet just yet.

China Trade Tensions

Chinese stocks have been weighed down by the back-and-forth between Washington and Beijing as the U.S. and China slap each other with hefty tariffs in an effort to win a battle that appears to be progressing towards a full-blown trade war. The Trump administration’s hard line on China has hurt several U.S. companies, but Chinese tech firms are suffering the most. Not only are companies like JD, Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU) hurting because of trade tension, but worries about the currency crisis in Turkey spreading to other emerging markets have also weighed on sentiment.

Most analysts believe that the U.S. and China will come to an agreement that will take some of the pressure off. In fact, China is planning to send a delegation to the U.S. during the second half of August in order to discuss trade issues, a development that many hope will put an end to the ongoing tariffs. 

So with that in mind, you might be thinking about buying JD stock in order to ride the wave higher after the trade issues have been settled.

More Than Just Political Headwinds

However, you might want to think again because JD stock has a few more issues on the horizon other than trade tension. While the majority of its peers rose after China announced that it would hold talks with the U.S. at the end of the month, JD continued to spiral because the company’s second-quarter earnings report showed that investors might have bigger problems than political issues.

JD posted a second-quarter loss of 2.2 billion yuan, surprising analysts who expected a much smaller figure. Plus, although the company’s revenue surged 31.2% to 122.3 billion yuan, it still came in below the consensus outlook of 122.7 billion yuan. Even more troubling was the fact that the firm’s sales guidance for the current quarter of between 104.5 billon yuan and 109 billion yuan was below estimates as well. 

In short, JD isn’t performing as well as people thought it could, and the company is spending a great deal in order to grow and compete in the crowded Chinese e-commerce market. As competition grows more fierce among online retailers in China, heavy spending on marketing and promotions has significantly cut into JD’s results, and many are expecting to see a similar phenomenon when BABA reports its earnings next week. 

To be sure, spending significantly in order to facilitate  growth isn’t unheard of;  just look at Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX). But it’s worth noting that JD will probably report additional poor quarterly results this year, so investors might want to steer clear until the dust settles.

Not a Total Loss

JD stock isn’t a total disaster; the company has a lot going for it and is likely to enjoy a strong recovery once the fog clears. The company has an impressive logistics arm that outshines competitors’ logistics units and will be difficult to compete with. JD management says it’s planning to use that division in order to generate a new revenue stream. The strategy could help offset the firm’s heavy spending in the future, but it won’t have a material impact until some time next year, at the earliest.

The Bottom Line on JD Stock

JD stock has a rocky road ahead, and investors might not want to jump on board just yet. The company is facing several headwinds this year that are likely to keep JD stock in the low 30s for an extended period of time. The fact that JD didn’t rise at all following news about trade talks between the U.S. and China speaks volumes; there are simply too many factors weighing on the stock right now to make it a good play.

As of this writing, Laura Hoy was long AMZN and NFLX. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/jd-stock-has-potential-but-its-not-time-to-buy/.

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