Should JD.com Stock Holders Be Worried About Employee Exodus?

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It’s been almost a year since JD.com (NASDAQ:JD) CEO and founder Richard Liu was arrested on suspicion of rape. Since then, JD stock has lost about 10% of its value. Of course, it could have been much worse.

Should JD.com Stock Holders Be Worried About Employee Exodus?

Liu was not convicted , and even though the university student who made the allegations is suing JD.com’s CEO for undisclosed damages, investors seem to have forgiven the e-commerce company.

JD stock is up 35% year-to-date through June 18, recovering most of the losses from the fall and early winter.

One thing that has cropped up in recent months that could affect JD.com though is the departure of several key executives.

In May, Lan Ye, a key driver of the company’s growth, stepped down. In June, chief technology officer Zhang Chen, who was responsible for the company’s unmanned logistics operations among other projects, left the company. Also going is general counsel Lu Yong.

Not only are top-level executives leaving, but so, too, are mid-level managers, a sign that Liu’s management style might be rubbing employees the wrong way.

Should JD stock investors be worried about the exodus? You betcha, but for other reasons.

Talent Takes Flight

It’s easy to point to JD.com’s chief executive as the reason for the culture problem at the company. However, a more significant concern might be that the real reason people are leaving is that JD.com is losing the e-commerce battle to Alibaba (NYSE:BABA), Pinduoduo (NASDAQ:PDD) and all the other smaller e-commerce companies that do battle in China.

“Talented workers are starting to quit because they are worried about the outlook for the company,” the Nikkei Asian Review reported, quoting an anonymous employee.

My InvestorPlace colleague Dana Blankenhorn recently discussed the growth issues facing JD.com.

“Serving 60-something moms and dads in rural villages is unique but selling refrigerators to their kids in Shanghai is harder,” he wrote on June 19. “Despite having stores as big as 500,000 square feet, that’s where I place my worries because then JD.com is competing directly with Alibaba.”

Dana believes that a profitable JD.com is a stock worth considering given it trades at the same price-to-sales ratio as Walmart (NYSE:WMT), the largest retailer in the world.

Profits are always good.

In the first quarter ended March 31, JD.com generated $190.7 million in free cash flow, which is 1.1% of revenue in the quarter. By comparison, Alibaba generated $1.6 billion in free cash flow in its latest quarter ended March 31, representing 11.5% of its revenue.

JD.com might be profitable in 2019, but it’s got a long way to go to meet Alibaba’s cash flow generation.

There’s No Problem

Just before CEO Liu’s arrest in late August, I was still on the JD.com bandwagon. I didn’t think it was in Amazon’s (NASDAQ:AMZN) league, but I believed it had a good business.

I don’t think JD shareholders need to worry about the company’s business. Overall, it’s very strong. Unless it delivers a dud of a quarterly report, the mid $30s appear to be an artificial floor,” I wrote August 6. “I wouldn’t be surprised if JD stock was trading over $50 by this time next summer.”

By Labor Day, Liu had been arrested, resulting JD stock down to the high teens by the end of the year. It has since recovered most of those losses.

After the Liu revelations, guilty or not guilty, I recommended that investors stay away until the truth came out. Although that’s still a matter for the civil courts, the CEO hasn’t been charged with a crime. End of, as the Brits say.

Another InvestorPlace colleague, Luke Lango, who owns JD stock, recently suggested that JD.com’s Amazon-like growth strategy was back on track.

“Revenue growth has stabilized over the past two quarters around 20%, and projects to stay at 20% next quarter too. Meanwhile, operating margins expanded 70 basis points in the fourth quarter of 2018, and 80 basis points in the first quarter of 2019,” Luke wrote June 17.

“Thus, the Amazon roadmap of sustained big revenue growth on top of margin expansion is once again the underlying trend at JD.”

If you read between the lines, the fact that employees are leaving JD.com has less to do with its business outlook and more to do with the fact people don’t stay with companies nearly as long as they once did.

It’s time to turn the page.

Bottom Line on JD Stock

While I agree with most of my colleague’s sentiments about JD.com, I have less conviction that JD stock is going to run much higher in 2019. Perhaps it gets to the mid-$30s with another good earnings report. Beyond that, I’m doubtful.

As for employees leaving, I wouldn’t give it a second thought. Good people leave companies all the time. JD.com’s no different.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/should-jd-com-stock-holders-be-worried-about-employee-exodus/.

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