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Why the 2019 Rally of JD Stock Isn’t Over Yet

Last  year was tough for the shares of Chinese e-commerce juggernaut JD.Com (NASDAQ:JD). JD stock tumbled from its $50 highs in early 2018 to its $20 lows in late 2018, as everything that could’ve gone wrong for JD did go wrong.

Why JD (JD) Stock Price Can Rally Meaningfully Further

Source: Shutterstock

The growth of China’s economy slumped to multi-year lows in 2018. The trade war between the U.S. and China  heated up, putting further downward pressure on China’s economy. Chinese consumers lost confidence. That weighed on JD’s revenue growth rates, which , like China’s economy, slumped to multi-year lows. The company’s margins came under pressure as JD continued to invest in next-generation opportunities.

JD’s profit was flat in 2018, and JD stock lost more than half of its value.

But the company’s performance has been very different in 2019. China’s  consumer and services sectors  have picked up steam. The U.S.-China trade war has cooled. Chinese consumers are regaining their confidence. JD’s revenue growth rates are stabilizing. Its margins have started expanding again.

As a result of these trends,  JD’s profit growth has accelerated in 2019, and JD stock has risen an impressive 47%.

This renewed strength of  JD stock price will persist for two major reasons. First, China’s consumer economy in general and its  digital consumer economy in particular are showing signs of improving, at the same time that JD’s margins are rebounding. Second, JD.com stock remains undervalued relative to its long-term growth potential.

This coupling of a favorable valuation and improving operational trends should keep JD stock price on a wnining path for the foreseeable future.

The Trends Are Now in Favor of JD Stock

In 2018, the trends were moving against JD.com stock.

Specifically, China’s retail sales growth slowed from 10.2% in 2017, to 9% in 2018, while the proportion of physical consumer products bought online fell from 28% in 2017 to 25.4% in 2018. This online retail slowdown caused JD’s revenue growth to drop. The company’s revenue growth rate went from over 40% in 2017 to under 30% in 2018. At the same time, JD was investing  a large amount of money in next-generation growth opportunities, and its operating margins sank 50% in 2018.

In 2019, however, the trends have shifted, and they are now working in favor of JD stock.

China’s retail sales climbed 8.4% year-over-year in the first half of 2019. While that’s slower than 2018’s 9% growth rate, things are improving for JD stock in 2019. In the first half of 2019, retail sales growth (8.4%) was greater than first-quarter retail sales growth (8.3%), retail sales growth in June surged to its highest level since March 2018, and online retail sales growth in the first half of 2019 (21.6%) was higher than Q1’s online retail sales growth (21%).

Broadly, then, China’s consumer economy is showing signs of rebounding.

Additionally, JD’s revenue growth rates are stabilizing in the 20% range, and JD’s margins are bouncing back as the impact of its growth investments fades (its operating margins have risen by 0.7 -plus percentage points in each of the past two quarters).

All in all, the things which whacked JD stock in 2018 (a slowing consumer economy, falling growth rates, and compressing margins) have reversed course in 2019.

JD Stock Remains Undervalued in the Big Picture

In the big picture, JD stock remains undervalued relative to JD’s long-term growth potential.

According to eMarketer, China’s online retail market will continue to grow at a robust  annual rate of 15%-plus for the next several years. That makes sense. It’s growing at a 20%-plus rate today, and China has a lot of people, the majority of whom are rapidly urbanizing and digitizing. This non-cyclical demographic trend should spur strong growth throughout China’s online retail market for the foreseeable future.

JD is one of the two biggest players in that market. The platform is already so big – and so embedded into China’s consumer economy – that it’s tough to see it being unseated anytime soon. As a result, as China’s online retail market grows at a 15%-plus pace over the next several years, JD’s revenues should increase at a similar rate.

Alongside that healthy revenue growth, JD’s margins should expand as it grows. Companies with large retail operations like Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT)  have operating margins of around 4-5%. JD should be able to reach that point over time. Thus, by 2025, it’s reasonable to predict that JD’s operating margins will rise towards 4%.

As a result, it’s clear that JD’s earnings per share can rise towards $3 by 2025. Based on a  20-times forward multiple, which is average for the consumer discretionary sector, the 2024 price target for JD stock would be $60. Discounted back by 10% per year, that equates to a 2019 price target of roughly $37.

JD stock presently trades at just a hair under $31.

The Bottom Line on JD Stock

2018 was an awful year for JD stock. But 2019 is turning out to be a great one. Already up 47% year-to-date, JD stock price looks ready to run even higher into the end of the year.

As of this writing, Luke Lango was long JD, AMZN, and WMT.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/why-the-2019-rally-of-jd-stock-isnt-over-yet/.

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