It’s been a rough few weeks for Chinese stocks — and emerging markets in general — to say the least. And none has been hit harder it seems than e-commerce giant JD.com (NASDAQ:JD). JD stock has been punched on all sides — from missed revenue expectations to slowing growth in Asia’s Dragon Economy. And because of this, JD stock is down nearly 11% in August and more than 25% year-to-date.
The question now is whether or not that slide makes JD.com worthy of a purchase.
After all, we are talking about the second-largest e-commerce firm in arguably the largest consumer story of the next few decades. And there is a lot to like at JD.
But there’s also plenty of reasons why the stock is now trading at basically a 52-week low. For JD.com, the answer is pretty complicated.
The Bad News at JD Stock
The big slide at JD.com can be attributed to a few mega-sized factors. The obvious one is the little trade tit-for-tat going on between Washington and Beijing. The war of words and resulting tariffs are really starting to affect stocks in the emerging nation. Not only have investors fled Chinese equities in spades with each resulting tax, the effects of the trade disputes are starting to result in some serious consequences for the Chinese economy. Consumer confidence in the nation has dropped sharply in recent weeks and now sits at lows not seen since September of last year.
Naturally, when your company is focused on consumer health, neither a hefty tax on imported goods nor the fact consumers want to spend less are good things for your business. Strike one against JD stock.
The second strike for JD.com is actually more self-inflicted.
Profits at JD have been pretty non-existent over the last few quarters and the losses have been getting worse. This quarter, the firm lost a staggering $334 million or around 23 cents per share. That’s a huge increase over the 3 cents per loss it recorded last year at this time. Free cash flows from continuing operations fell by more than 34% during the quarter.
The reason continues to be falling margins brought about by hefty CAPEX spending. In order to take on Alibaba (NASDAQ:BABA) and improve its position in China’s rich consumer market, JD has started spending big time on tech and other initiatives. The hope is that over the long term, improving its technology, fulfillment, and logistics assets will give it a big edge over BABA in the sector. But improving tech and implementing new logistics ideas aren’t cheap.
Research and development costs at JD.com rose by roughly 80% — or $400 million — year-over-year. That increase in expenses related to improving its tech and hiring more staff resulted in a big drop in its free cash flows as well. Year-over-year, JD managed to see free cash flow sink 41% to land at $1.99 billion.
With these two strikes against the firm, it’s easy to see how JD stock has fallen.
Still Plenty of Good at JD Stock
However, investors may not want to throw away JD stock just yet. That’s because the firm still has plenty of tricks up its sleeve.
For one thing, it’s starting to gain more market share and a bigger piece of the Chinese e-commerce pie. Revenues actually surged over the course of the quarter and managed to crush estimates by about $700 million. And JD.com still expects that revenues will grow another 25% to 30% over the next quarter as well. That’s some torrid growth and actually outpaces the overall growth in the Chinese e-commerce market. It really shows that its investments in tech are sending more consumers into its ecosystem and that JD is justified in spending the cash.
Speaking of that ecosystem, JD has managed to attract plenty of big-name partners. This includes Walmart (NYSE:WMT) — which owns about 10% of it — and Chinese tech giant Tencent (OTCMKTS:TCEHY). Meanwhile, it has managed to score data and user deals with Google (NASDAQ:GOOG)(NASDAQ:GOOGL) and Chinese gaming/online firm SINA and video content producer iQiyi (NASDAQ:IQ). The strength of some of the biggest names in retail and the online world highlight JD’s better businesses model of using first-party services for its marketplace. Those partners also give JD an edge in getting access to potential consumers, additional sources of revenue streams and a hefty dose of logistics technology.
And we cannot forget that China’s e-commerce and consumer story is still really in the early innings. There are millions and millions of consumers just getting started on their online shopping journeys.
Buy, Sell Or Hold JD Stock?
As you can see, the near-term picture is pretty rocky for JD stock. The trade woes plus rising CAPEX/tech spending is going to put a big crimp on its prospects for a few more quarters. But that could provide plenty of opportunities for the longer haul. JD.com is building a great ecosystem with plenty of top-notch partners to take advantage of the longer trends in the Chinese consumer market.
So, what is it? Should you buy JD stock? Maybe. If your timeline is long and you can stomach the volatility of the next year or so, then yes. JD stock could be a great buy now. However, the caveat is that we could see lower share prices if the market really starts to dive.
But all in all, JD.com represents a top-notch growth play that is currently experiencing a bit of a funk. Longer term, the play still remains solid. Its moves today will pay off.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
