Until mid-May, the shares of Chinese ecommerce powerhouse, JD.com (NASDAQ:JD), had been in the bull mode. They went from $21 to $30. But lately, things have gotten wobbly with JD stock.
Note that the return is about -13% from the highs. Yet in comparison to other large Chinese operators, the drop has not been as pronounced. For example, Alibaba (NASDAQ:BABA) is down by 23% and Baidu (NASDAQ:BIDU) is off a grueling 33%.
Yes, when it comes to Chinese tech stocks, there is usually a good amount of volatility. After all, there is always the pervasive political risk, which has been heightened lately.
Might there be an opportunity with the sell-off in JD.com stock? Is it time to think of a purchase? Well, for the most part, I think there could more downside from current levels, and to see why let’s take a look at the following:
JD Stock: Drama and Distraction
JD.com has really been weighed down by drama and distraction. All this is mainly due to the founder and CEO, Richard Liu. Last August, he was arrested in Minnesota for “criminal sexual conduct” against a female student. While the charges were dropped, it was still a concerning episode for investors.
Since then, Liu has been the center of more controversy. For example, he called some of his workers “slackers.” This was in response to the growing discontent in China about long work hours called “996,” which stands for a six-day work week that has a daily schedule from 9 a.m. to 9 p.m.
Such things come against the background of JD.com’s decelerating growth ramp. During the latest quarter, the revenues increased by 21%, which was the lowest since the company came public. To put things into perspective, the revenues were up by 33% in Q1 of 2018.
Even more worrisome is the sluggishness of annual active customers growth, coming to only 3% in Q1. A year ago, it was 28%. This is kind of perplexing, actually, since JD.com has a partnership with Tencent (NASDAQOTH:TCEHY), which operates WeChat, the largest social network in China. Shouldn’t this be a source of much more growth in the customer count?
I think so. If anything, this does look like a sign of a lack of discipline and execution from management.
JD Stock: Valuation
The valuation is not cheap. Consider that the forward price-to-earnings multiple is 27X.
This is at a premium to BABA, which is trading at 22X. And yes, the company is growing much quicker and has a more diversified platform such as with its cloud business and entertainment ventures.
JD Stock: Trade and the Chinese Economy
The escalating tensions between China and the U.S. is perhaps the biggest risk factor for JD.com. Keep in mind that the company has recently initiated layoffs of 8% of the workforce. True, there was probably a need for restructuring. But the move does point to challenges with growth in the business. In fact, the company has also been getting more aggressive with promotions and discounts.
As for the trade situation, it is far from clear what the endgame will be as both sides have been digging in. With the rise of uncertainty, there could easily mean slower growth in China as businesses pull back on investments. This means there could be increased headline risk for JD Stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.