Beyond the size of the market, JD.com’s (NASDAQ:JD) market share may be at risk. The company long has been a distant number two to Alibaba (NYSE:BABA). That said, evidence sprouted that JD.com was taking share, as Luce Emerson wrote back in 2017. However, that no longer appears to be the case, fading one of the declining reasons to buy JD stock.
Still, Alibaba is expected to lose market share again. But that share isn’t going to JD.com. Rather, smaller rivals like Pinduoduo (NASDAQ:PDD) have stepped in. Additionally, other companies taking advantage of Tencent Holdings (OTCMKTS:TCEHY) app WeChat took market share for themselves.
As we’ve seen in the U.S., technology allows smaller operators to compete head-to-head with massively larger firms. That’s likely going to be the case in China as well. Therefore, JD.com stock faces risks as the underlying competition defends its existing turf.
Rising Costs Hurts JD.com Stock
The other concern is below the operating line. Part of the reason JD stock has rallied is because margins have expanded, notably in the first quarter. Years of investments have deflated profit, but that’s starting to change. With JD heading to real profitability — analysts expect over $1 in adjusted EPS in 2020 — investor confidence has risen.
The question is whether that can hold. Some signs suggest that it might not. Management said in February that it would add 15,000 employees this year. Those plans appear to have changed.
Multiple sources reported in April that the company was cutting 8% of its workforce. Soon afterwards, CEO Richard Liu wrote an internal letter citing huge losses in the company’s logistics unit as the rationale for cutting the pay of delivery couriers. Liu elsewhere complained about “slackers” in his business, a complaint that drew scrutiny in the Chinese media. It also sparked discussions on social media amid debates over work-life balance in Chinese tech.
To be sure, layoffs aren’t necessarily bad news. And they don’t mean that JD.com or JD Logistics are headed for declining earnings. JD.com hasn’t just reduced its staff and delivery courier pay; it cut 10% of its executive workforce in February. Management explained this as a move to speed decision-making. Some pruning after growth makes sense.
But the pressure on the logistics business is worrisome. Logistics is the bread-and-butter of Alibaba, JD.com’s key competitor. Margins overall for JD.com are quite low: there’s no room for pressure if the company must reverse its pay decision or cut the hours of staff elsewhere. It’s not difficult to get the sense that JD.com is pushing its employees as hard as it can. And with adjusted operating margins under 2%, it has little recourse if they push back.
The Case for JD Stock
Again, this is not to say that JD stock is headed for a flameout. This still is the number-two e-commerce play in a still-growing market at a valuation that looks reasonable.
But back above $30, the case does get a bit thinner. Plus, execution becomes more important. Below $20 late last year, JD.com stock was simply too cheap, priced for all but a worst-case scenario.
But with the JD stock price more than 50% higher, that’s not the case.
And there are challenges to watch here. The Chinese economy still may not be that healthy. JD Logistics needs to get better; as Liu himself pointed out, the business only has two years’ worth of cash left. Smaller competitors are coming. JD.com has a large enough, and profitable enough, business to thrive in this new environment. Unfortunately, the room for error is not what it used to be.
As of this writing, Vince Martin has no positions in any securities mentioned.