As the potential of JD.com (NASDAQ:JD) draws interest, the company remains mired in a trade war hitting most Chinese stocks as well as a few self-inflicted problems. While this may hamper JD stock for now, the company should grow long-term as JD extends its reach both into established markets and, in some cases, markets ignored by the investment community.
JD Stock and the Trade War
Without question, the 800-pound gorilla driving JD.com remains the U.S.-China trade war.
JD continues its alliance with Walmart (NYSE:WMT). Nonetheless, the trade war affects mostly its customers, who have less money to spend with more limited access to the U.S. This brought the stock price from $50 per share down to $20 last year. A recovery has taken it above $28 per share. Still, JD trades more than 40% below its all-time high.
Another factor involves the legal troubles of company founder and CEO Richard Liu. We now know he will not go to jail, but civil allegations related to the rape accusation remain an issue.
Such personal matters should concern investors. The company has no clear successor or even a plan of succession. Given the scope of Liu’s troubles, a succession plan would remove a source of uncertainty that weighed on JD stock last fall.
His management decisions have also led to criticism. The so-called “996” schedule, 9:00 am to 9:00 pm, six days per week has attracted a lot of negative publicity. Mr. Liu also faces attacks for criticizing employees perceived as lazy or unwilling to sacrifice for the company.
Still, barring a major strike, labor complaints rarely affect stocks. Also, I think management will find a way to fill the vacuum should something happen to Mr. Liu. After the trade war ends, traders will more than likely judge JD for what the company does right and how that benefits investors.
Investment and JD Stock
What has benefitted investors is the investment in infrastructure. While many believe the logistics network itself will trade under a separate stock, JD’s management has no plans to list this unit separately on the markets.
However, logistics remains the factor that separates it from its larger rival, Alibaba (NYSE:BABA). Rather than acting as a middleman like Alibaba, JD built a logistics network comparable to that of Amazon (NASDAQ:AMZN) in the United States.
This gives JD an advantage as it facilitates omnichannel retailing. With a forecasted 94.3% earnings increase this year and 50% the next, these investments have begun to pay off. Moreover, traders can buy this kind of earnings growth at a relatively low price. Currently, the stock trades at a forward price-to-earnings (PE) ratio of about 27.2.
Admittedly, such a multiple would appear expensive to most stocks. Also, should profits on JD stock take a sudden dive, the company might struggle to maintain this multiple. However, considering the earnings growth, 27.2 times forward earnings looks like a bargain.
Further, as I mentioned in a previous article, investors should not discount its investment in Indonesia. At a population now estimated at over 269 million, it has more people than two more recognized emerging markets, Brazil and Russia. Hence, as it gains more attention as an emerging market, the rise of Indonesia should help JD stock to rise as well.
Yes, the company needs the trade war to end, and the company should address its succession issues. However, given the deep investments and its reach across the world, I see little else that can stand in the way.
Concluding thoughts on JD stock
JD’s deep infrastructure investments at home and its reach abroad should help JD.com stock overcome its challenges long term. Admittedly the trade war and Mr. Liu’s legal troubles have influenced the stock’s short-term performance. Some of his management decisions have also brought criticism.
However, when one can buy 50%-plus profit growth for 27 times forward earnings, it should pay off at some point. This makes JD stock a winner—as soon as it can put the trade war behind it.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.