I’ve been bullish on Chinese ecommerce play JD.com (NASDAQ:JD) for some time now. That bullishness seemed wise when JD stock hit $50 near the beginning of the year. It looks downright foolish now, with JD.com stock at $21.

As stubborn as I’ve been in clinging to the bull case all the way down, at this point it might be time to cut bait. I still think JD.com has an intriguing long-term opportunity as a clear #2 to leader Alibaba (NYSE:BABA).

And JD stock doesn’t have the accounting and ownership issues of its larger peer. Investments in the business are hitting near-term earnings – but could, and perhaps should, pay off down the line.

Even with a bottom coming in for the moment at $19, there’s still a lot of near-term risk here. Trade war concerns aren’t going anywhere. Earnings continue to disappoint. The CEO is in serious legal jeopardy. And JD stock, at least on an earnings basis, isn’t cheap.

It’s possible I’m leaving the bullish camp just as the stock is ready to bottom. But I still believe, at least in the near term, that JD.com stock might have one more leg down, at least.

The Earnings Problem for JD Stock

Chinese stocks have declined across the board. The 49% drop in JD.com so far this year is the worst among Chinese large-caps, but JD isn’t alone in struggling. Weibo (NASDAQ:WB) is off 40%, Sina (NASDAQ:SINA) 36%, and Baidu (NASDAQ:BIDU) 23%. (BABA is only down about 10%, though it’s fallen 26% from summer highs.)

There’s two basic factors at play. Worries about the Chinese economy have accelerated due to the impact of U.S. tariffs. That in turn has lowered near-term earnings expectations. At the same time, the multiples investors will pay for those earnings have compressed, that, too, due to a sense of higher risk.

Of late, the issue has been more pronounced on the earnings front. Over the last 90 days, Weibo consensus EPS estimates for 2019 have fallen by 15%; the stock has dropped 13.4%. Baidu consensus has come down 12%; BIDU stock has declined 16%. Perhaps surprisingly, BABA’s earnings multiple has expanded: the stock is down 2.5% despite a 13% reduction in 2019 earnings expectations.

For JD, the earnings problem is particularly pressing. 2019 consensus EPS, in three months, has dropped to $0.58 from $0.88 – a 34% decline. The stock is only down 22%. But its expectations have come down faster than those of peers because the issue isn’t just the Chinese economy.

JD is ramping investments across the board, which have sent 2018 earnings down as well: current consensus suggests a nearly 50% decline in EPS  this year. The end result is that JD.com stock isn’t cheap. It still trades at 37x forward earnings. That’s a potential problem for a couple of reasons, at least in the near term.

Two Big Risks

The first big risk is that more margin compression is on the way. JD.com has ambitious plans, including, as James Brumley pointed out last month, setting up a U.S.-facing online store. It’s partnered with Walmart (NYSE:WMT) for a brick-and-mortar rollout.

It has teamed up with Alphabet (NASDAQ:GOOGL,GOOG) as well. (Note that Alphabet paid over $40 per ADS, close to double the current price.)

Those investments have cost more than investors and management expected. And there’s not much reason to see that changing any time soon. It leaves JD with thin margins and little room for error. Any growth slowdown only exacerbates the earnings problem, and leaves JD.com stock looking expensive even it declines further.

The mid-term risk is that JD is ramping up into the teeth of a long-awaited recession in its home market. That creates a potential “double whammy” scenario for JD stock: spending increases now, and returns on those investments don’t arrive in 2019 or even 2021.

At that point, JD.com earnings growth probably looks minimal at best. And it’s difficult to see a 30x+ P/E multiple holding for the duration – meaning JD stock gives way at some point.

The Bull Case for JD Stock

There’s certainly an argument that some of these risks are priced in at this point. Even if it takes a few years for sentiment toward JD and other Chinese plays to reverse, JD.com stock rises 100%+ if just gets near past highs.

And a $30 billion market capitalization for the second largest ecommerce retailer in the world’s most populous country certainly has room to grow; if JD.com succeeds.

But at the moment, it sure looks like it’s going to take some time for that case to play out, with 2019 another investment year. I don’t see China’s macro worries dissipating any time soon.

Trading this week shows the market has little appetite for any more bad news on the trade front. Long-term, I still think JD stock is going to rise from current levels. But it very well may get worse before it gets better.

As of this writing, Vince Martin has no positions in any securities mentioned.