JD.Com (NASDAQ:JD) stock plunged in morning trading on Tuesday. Reports of CEO Richard Liu’s arrest in Minnesota on sexual assault charges created a great deal of concern among investors. While the public knows little about the case, authorities allowed Mr. Liu to return to China. However, from the perspective of the JD stock price, the arrest provides a mere distraction from the stock’s most significant obstacle to growth — the U.S.-China trade war.
News of Mr. Liu’s Arrest Hammered JD Stock
JD stock fell by over 6% in early trading following the news. Such an arrest creates both uncertainty and an unnecessary distraction. However, these charges leave more questions than answers. Mr. Liu came to Minneapolis because of his enrollment in the University of Minnesota’s doctoral program in business. The police arrested him on sexual assault charges, yet authorities released him and allowed him to return to China. As for the charges, we know little, as the investigation remains ongoing.
However, such an arrest potentially puts JD into jeopardy, as Mr. Liu also holds 80% of the company’s voting rights. Thus, his presence remains integral to the company and he must attend all company board meetings. Given these ties, losing him would have a massive impact on JD stock.
Still, since authorities allowed him to return to China, I question how much significance this has to JD stock. Despite becoming the second-largest Chinese e-commerce company behind Alibaba (NYSE:BABA), the company’s ties to the United States remain indirect.
Both Walmart (NYSE:WMT) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) act as stakeholders in the company. For this reason, the CEO’s legal issues could impact JD stock for a time.
The Trade War Remains the Main Worry
That said, the main worry for JD stock still revolves around the trade war with the U.S. The company derives all of its revenue from East Asia and import little from the United States. However, do not think that this allows JD to escape the effects of a U.S.-China trade war entirely. JD serves millions of Chinese customers who depend on U.S. trade for their livelihoods. For this reason, less trade with the U.S. means less money these customers have to spend on JD’s offerings.
Due in large part to the trade war, JD stock trades more than 40% below its 52-week high. Still, despite the trade-related concerns, analysts expect revenue to rise 30% this year and 25% the next. And although profits will fall by about 16% this year, next year analysts expect to see profits rise by almost 105%. This will give the company comparable to growth to Amazon (NASDAQ:AMZN).
For this growth, JD stock investors will pay a forward price-to-earnings (PE) ratio of 62. This compares with a forward PE of almost 120 for AMZN. Moreover, since JD has a market cap of less than 5% of the size of Amazon’s, the company will likely see this level of growth for a longer period. The allegations against Mr. Liu will send the stock downward for a time. However, once the herd ceases to push JD stock further downward, traders should look to buy at that time.
Final Thoughts on JD Stock
Despite Mr. Liu’s potential legal problems, the trade war remains the primary negative influence on JD stock. Without a doubt, Mr. Liu’s dominant stake means any ongoing legal trouble for him could devastate JD.
However, investors should also remember that Mr. Liu returned to China despite this legal cloud. The fact that police allowed such a release indicates they lacked sufficient evidence to prosecute him. Moreover, the company continues to see its massive growth slowed by a trade dispute with the U.S.
Still, this disagreement continues to push JD stock price lower, especially compared to Amazon. At some point, the downward trend in the equity will turn bullish. When that time arrives, both the trade war and these legal allegations will be looked back upon as a lucrative buying opportunity.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
