Taking classes is apparently more popular among the CEOs of Chinese companies than among their American counterparts. We learned last week that JD.com (NASDAQ:JD) CEO Richard Liu was enrolled in a business doctorate program run by Beijing’s Tsinghua University and, surprisingly, the University of Minnesota. Thus, Liu was in Minneapolis last week when something happened. Maybe it was a misunderstanding, maybe it was something more. Either way, the police were called, and his mug shot, complete with an orange jumpsuit, got plastered all over China’s Internet. JD stock was down over 6% in early afternoon trading today, falling below $30 per share.
Is JD.com stock the bargain of the year?
Last-Mile Infrastructure
Before you jump in, understand what you’re getting when you buy JD stock.
It’s not Alibaba Group Holding (NASDAQ:BABA), with which it’s so often compared. JD.com is more interested in last-mile infrastructure, i.e. using technology to lower the cost of delivering goods to consumers, no matter where they are. JD.com has a different “special sauce” than Alibaba and is building a delivery moat that should be more secure from competition than BABA’s business. But that moat is more difficult to build than anything its e-commerce rivals are attempting.
Among JD.com’s partners are Tencent Holding (OTCMKTS:TCEHY), which has 18% of JD stock, Alphabet (NASDAQ:GOOGL), which invested $550 million in JD stock in June, and Walmart (NYSE:WMT), which sold its own Chinese business to JD in 2016 for what was then a 5% stake.
After it builds a system of fulfillment warehouses and delivery centers, JD.com can make money by serving the tiniest hamlets of China. It’s a model that could be exported to many more people and places than Alibaba’s model, or even Amazon.com’s (NASDAQ:AMZN) model. Think Africa, think India, think Southeast Asia. Think Idaho.
Right now, JD stock is selling for 40% below its 2018 high of about $50 per share. That’s partly due to the company’s second quarter loss of 23 cents per share on revenues of $18.5 billion. Alibaba has been challenging JD, building shopping centers, and a start-up called Pinduoduo, a sort of Chinese Groupon (NASDAQ:GRPN), is also moving into its territory.
What JD Is Doing
As Liu explained on his most recent earnings call, JD.com is investing in drones and autonomous vehicles with the aim of cutting its rural delivery costs far below the level that rivals pay. JD also hopes that its initiatives will allow local producers to serve urban markets faster than they can with trucks. Imagine an isolated Idaho farmer exchanging artisanal mushrooms for the latest Jason Isbell CD.
As I wrote last month, more of the world is like rural China than like urban China. Once its business model is proven, JD.com should be able to make the whole world accessible to two-way e-commerce. That’s what led Walmart and Google to partner with JD and to acquire so much JD stock.
While JD.com seems weak, a lot of Western companies believe that it’s strong. Unilever (NYSE:UL )became the latest company to partner with JD on logistics, as it chose JD.com as its Chinese delivery partner.
Investors would be wrong to think of JD in terms of Alibaba or (worse) blockchain. This isn’t about those things. It’s about logistics.
The Bottom Line on JD Stock
Once you understand what JD.com is, and what it isn’t, you can make a more educated bet on this company and on JD stock. The current market cap of JD.com stock, about $43 billion, is high for a retailer, but it’s below that of FedEx (NYSE:FDX), which is JD’s real counterpart.
Ignore Liu, JD’s CEO. He’s embarrassed but he’ll get over it, and so will JD and JD.com stock. Focus on the company’s strategy instead.
Dana Blankenhorn http://www.danablankenhorn.com is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family https://www.amazon.com/Reluctant-Detective-Finds-Her-Family-ebook/dp/B07FSRDR4Y/, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and AMZN.
