JD.Com (NASDAQ:JD) was down more than 3% on Monday following the release of its third quarter numbers. The top line fell short of expectations. Given that JD’s primary rival, Alibaba (NYSE:BABA), fell short of last quarter’s revenue estimates, one would have thought the potential miss would already be priced into JD stock as well. Yet, there it is.
To pour salt in the wound, the Chinese e-commerce outfit served up Q4 guidance that also fell short of analysts’ projections.
With the JD stock price now down 57% from its January peak, are shares bargain priced and finally ripe for a rebound? Or, will JD.com go ahead and move deeper into new 52-week low territory, which is just pennies away?
Well… it’s likely things will get worse before they get better.
JD.com Earnings Recap
For the quarter ending in September, JD.com turned 104.8 billion yuan ($15.3 billion) worth of revenue into a per-share profit 0.80 yuan. The bottom line topped estimates of 0.72, but analysts had modeled revenue at 106.2 billion yuan. Perhaps more alarming is that sales, though up 25% year-over-year, are still nowhere near 2015’s peak growth pace of 60%. JD’s rate of progress continues to slow, with most investors realizing the company’s sheer size will prevent it from ever growing that rapidly again.
JD said big-ticket items were a particularly challenging category, although a closer look at its income statement and expenses indicates challenges across the board.
In short, JD.com doesn’t appear to be scaling up in a cost effective way. The top line grew 25%, but so did JD’s cost of revenues. Fulfillment expenses were only up 22%, but market expenses were up 25% while technology and content spending nearly doubled year-over-year. General and administrative expenses were up 33%. Non-GAAP EBITDA fell from 2.1 billion yuan to 1.7 billion.
Free cash flow, though improved from year-ago levels, is still a big negative number of -8.2 billion yuan. JD stock isn’t making enough progress on the spending front to make the revenue slowdown palatable.
It would be naive to pretend China’s trade war — a war mostly being fought with tariffs — isn’t a core part of the reason JD.com is struggling. Like its rival Alibaba, JD directly and indirectly depends on fluid commerce channels which are now being clogged.
Just as much as the e-commerce (among other things) on business-to-business deals though, JD stock also depends on China’s growing consumerism.
Economic prosperity for workers grew in conjunction with the country’s economy over the past decade. But, the export-dependent economy has not performed well under the weight of new tariffs imposed by President Trump. The trickle-down effect of muted demand for its products is lower wages and freshly-created unemployment, crimping China’s consumer spending power at a time when it was starting to make a major contribution to the economy.
Unless the trade war abates, JD’s sales growth slowdown will only worsen.
Looking Ahead for JD Stock
Despite weakening consumerism, JD.com is still acting, and spending, aggressively, suggesting the company sees better days ahead as it cultivates its “retail as a service” platform.
It’s also investing heavily in technologies. And ripping a page from the playbook used by Amazon.com (NASDAQ:AMZN), many of those technologies are meant to gather data that can be used as a means of creating an even more potent marketing message. It’s working too. Last quarter, JD’s technology services arm grew revenue at nearly twice the clip that product sales grew.
The company is doing more than just borrowing an idea from Amazon, however. It’s aiming to compete head-to-head with it by setting up an online store that will specifically target U.S. consumers. That site should be up and running by the end of the year.
Nevertheless, it may not happen fast enough or be impactful enough to satisfy current and prospective JD stock shareholders. The organization said revenue growth for Q4 would be between 18% and 23%, year-over-year. Analysts, however, were modeling growth of 23.5%.
While down for the day, the JD stock price remains above a technical floor around $21.70. Should that support fail to keep the stock from losing any more ground though, given the backdrop and bearish momentum already in place, that small stumble could easily turn into a big one.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.