JD.Com (NASDAQ:JD) stock appears finally headed for a comeback. The equity plunged in 2018 as geopolitical concerns and the legal troubles of the CEO caused the stock to lose more than 60% of its value.
JD.Com is not close to the $50-plus per share highs of January 2018. However, JD stock trades close to its highest levels since its 2018 plunge. This is also the same level from where JD pulled back in April, calling into question whether it will continue to recover or remain range-bound.
JD.com Will Move Higher, Eventually
Long-term, I see JD stock as a winner. While it continues to lag Alibaba (NYSE:BABA) in sales, it has managed to stay ahead of Chinese conglomerate Tencent Holdings (OTCMKTS:TCEHY) in the retail sector. Also, as Amazon (NASDAQ:AMZN) has in other countries, it continues to build an extensive logistics infrastructure.
Most who follow JD stock are aware of its logistics advantage. However, investors should remember that short-term profits would likely come in higher if not for these infrastructure investments. For this reason, the forward price-to-earnings (PE) ratio of around 29.8 probably makes it much cheaper than it appears.
JD stock also looks cheap considering both the past and the predicted profit growth levels. Earnings rose by an average of 81.86% over the previous five years. Wall Street predicts similar increases, with 97.1% growth forecast for this year. Analysts also believe that this rate of increase will slow to 49.3% in fiscal 2020. However, the buy case remains intact with a forward PE under 30.
Where will JD go next?
That said, the short-term picture appears less clear. JD stock has risen by more than 62% since the lows of last November. It seems traders have figured out that the U.S.-China trade war has only a minimal direct effect on JD.com.
However, JD.com stock has again reached an inflection point. Currently, the JD stock price stands at around $31 per share. This is approximately the price level the equity reached in early April before pulling back.
If it falls from that level again, many traders will see JD stock as one stuck in a trading pattern. InvestorPlace contributor Josh Enomoto already calls the price action a “head-fake.” I have to concede that geopolitics remains an ongoing worry with China. Still, the price action indicates Wall Street seems less worried about these tensions. Moreover, even if JD falls from these levels, it may only amount to a correction. JD bounced back from a late-May low of $25.52 per share. If sentiment turns, it could easily head back to that level.
As for the bull case, if it can break through $31 per share, I think it could return to its 52-week high of about $37 per share. Interestingly, our own Luke Lango pegged the fair value of JD stock at $37 per share using discounted cash flows. I also think it will occur at some point. Still, until I see evidence that $31 per share is not a price ceiling, I would hold off.
Concluding thoughts on JD stock
Before buying JD stock, traders need to know if the equity has placed itself on the path to recovery or has become stuck in a range. Looking at the long-term case for JD, I see little not to like. JD seems poised to maintain its position in the Chinese retail market, and its logistics infrastructure could ultimately give the company an edge over Alibaba, which primarily acts as a middleman.
However, geopolitics and last year’s arrest of the CEO sent JD stock plunging. The stock has recovered from lows, but it remains unclear whether JD will continue its recovery or trade in a range. JD.Com trades at a reasonable valuation, and its growth can easily push it higher. Still, investors should only buy when they know $31 per share is not the ceiling.
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.