In a market that’s swung from terrified in December to buoyant in April, few stocks have benefited more than Chinese ecommerce leader JD.com (NASDAQ:JD). JD.com stock spent the second half of 2018 sliding almost without interruption, and touched an all-time low below $20 in December.
But the New Year has been good to JD stock, which has risen 49% YTD. Better market sentiment certainly has helped. And other Chinese stocks have rallied as well. iQiyi (NASDAQ:IQ), the so-called Netflix (NASDAQ:NFLX) of China, has risen by two-thirds. Vipshop Holdings (NYSE:VIPS), in which JD.com owns a stake, has gained more than 50%. Fellow ecommerce play Alibaba (NYSE:BABA) is up 39%.
Still, JD.com has earned some of its gains on its own. Strong Q4 earnings for JD.Com helped the cause. Perhaps as importantly, JD.com management has clarified its story and highlighted the success of the core business. That rightly has helped investor confidence.
JD Earnings and New Data
JD stock already had been rallying into earnings, admittedly. But the Q4 earnings report certainly helped the stock for two reasons. First, headline numbers handily beat consensus, including a $0.11 beat in terms of EPS.
But perhaps more important, JD gave investors some clarity as to the underlying business. For the first time (I believe), the company broke out operating income for its core ecommerce platform as well as new businesses. As Luke Lango pointed out in December, investors had become increasingly worried about the company’s narrowing operating margins. But disclosures in the Q4 earnings report explained why those margins were coming down.
For the core business, what the company calls JD Mall, the news actually looks pretty good. Operating income, in local currency, rose from RMB4.96 billion in 2017 to RMB7.05 billion in 2018. As the company detailed in its post-earnings slides, that implies a rise in operating margin from 1.4% to 1.6% – a huge improvement from a 0.2% print for the core business back in 2015.
Investments are coloring the consolidated figures, though. The company’s operating loss in efforts like third-party logistics, new technology, and overseas markets expanded markedly to RMB5.1 billion from RMB2.1 billion the year before.
On the whole, operating income for the year fell by one-third. But with the new businesses broken out, that decline seems less concerning. In fact, it sounds rather familiar.
JD.com’s strategy makes more sense with those disclosures. Margins in the JD Mall business are thin – which isn’t a surprise. The company is investing in customer acquisition and other efforts, which costs money upfront. The benefits come over time.
Elsewhere, the company is losing money. But there, too, the payoff should come years down the line, whether it’s the company’s expansion into markets like Indonesia or the buildout of its logistics business. It costs money to move into new markets, and it’s smart that JD is spending that money now. Spinoffs of its finance and logistics businesses are helping fund some of that spend.
What’s interesting about the strategy is that it’s an echo of the American ecommerce leader, Amazon.com (NASDAQ:AMZN). As many people have pointed out, it’s JD.com, not Alibaba, that truly is the “Amazon of China.” And what the Q4 disclosures show is that the strategies are somewhat similar. Like Amazon, JD is trying to build an impenetrable moat through a world-class supply chain.
And like Amazon, JD also is willing to spend now in new efforts with the hopes of adding new revenue and profit streams. Yet JD.com is much cheaper than Amazon: in fact, its market capitalization is about one-twentieth that of its U.S. counterpart.
Is JD Stock Cheap?
To be sure, this is not to imply that JD should be valued in line with Amazon or even close. And there are different ways of looking at JD stock even in the context of its strategy.
Obviously, the Chinese market has its own risks. Like Alibaba, investors have questioned JD.com’s accounting. The Chinese economy appears to be decelerating, and Alibaba presents a competitor that Amazon truly has never had.
And while the Chinese market will be larger than that of the U.S at some point, there’s also the question as to whether JD.com can penetrate Western markets. The company has started serving U.S. customers through its partnership with Alphabet (NASDAQ:GOOG,GOOGL). But that opportunity still is small – and JD.com has minimal presence elsewhere outside of Asia.
Still, there’s an intriguing case for JD stock, even with the YTD rally. The fears that drove JD stock to the lows last year may return. But from a long-term standpoint, JD.com’s strategy looks much clearer and more successful than some investors may have realized. For China bulls, that may be enough to believe that the rally should continue.
As of this writing, Vince Martin has no positions in any securities mentioned.