The trade war between the United States and China has been problematic for both nations, but despite the potential for economic strife both Beijing and President Donald Trump’s administration appear to be digging their heels in. The conflict between the U.S. and China has hurt investors, especially those with exposure to China.
However, if you’re a Warren Buffett disciple then you’re probably looking out for undervalued Chinese firms that have been hit by the trade tension. And JD.com (NASDAQ:JD) may be just that.
What is JD.com?
If you’re an investor then it’s unlikely that you haven’t heard of JD stock. However what makes JD stand apart from its peers like Alibaba (NYSE:BABA) is the firm’s business model. Unlike BABA, JD got its start as a first-party seller. The firm stocks its goods in self-owned warehouses and has made a name for itself by offering a quality customer experience. Initially, the firm concentrated on selling big-ticket items to wealthy customers, but has since expanded into a wide variety of goods.
Beyond its massive physical footprint, JD also carries a lot of value in its logistics business. With both of those aspects on firm footing, the company recently started adding third-party sales. Now merchants can stock their goods in JD controlled warehouses and use JD’s logistics arm to ship. Plus, JD is also wading into the digital advertising space which has helped expand margins significantly.
The reason it’s so important to understand JD’s development is because it underscores the fact that the firm is moving out of the grunt work and into the reward. Building out an extensive warehouse and logistics network is difficult and expensive, but now that those assets are in place, JD can start to capitalize on them.
Digital advertising and third-party sales are far more profitable than first-party selling and that’s where JD is heading. It’s encouraging as an investor to see a company that’s laying the groundwork and is only just beginning to reap the rewards of high-margin business.
Growth Is on the Horizon
JD.com’s most recent earnings report spotlighted the company’s growth potential. The firm delivered better-than-expected results in just about every way possible which helped boost the stock by 15% in the days that followed. Revenue growth was 23% and margins were significantly higher — even when you account for one-time tax benefits.
A year ago, I cautioned that JD stock was in for a rough ride whether the trade war dies down or not. Back then, I worried that the firm was having to spend big in order to deliver growth. I pointed out that spending in order to facilitate growth isn’t necessarily a bad strategy, but that investors might want to wait until the firm begins to grow organically before jumping in with both feet.
That moment appears to have arrived.
Golden Opportunity for JD Stock
What makes JD unique is the fact that the firm essentially shouted from the rooftops that its strategy is starting to pay off when it released its quarterly results last week. Investors responded and pushed the stock up 15% but the profit-taking has already begun. After nearing $32 per share at the beginning of this week, JD stock looks likely to make its way back below $30 before the week is over. JD stock lost 2% on Wednesday as investors squirreled away their profits and worries about the trade war weighed on Chinese stocks.
Of course, there are still concerns about an economic slowdown in China — but it’s worth noting that the sluggishness in the Chinese economy doesn’t seem to be pressuring consumer spending much, which is good news for JD stock.
The bottom line here is that JD stock’s e-commerce platform is growing in a country where online shopping is on the rise and the middle class is growing. The firm has already put in the hard work of building out its warehouse footprint and logistics network — making now an ideal time to jump on board. The only dark cloud hanging over JD.com right now is the U.S.-China trade war, which could cause some bumpiness in the near term.
However if you’re a long-term investor looking to buy while the market is fearful of Chinese stocks, JD stock should definitely be on your short list.
As of this writing, Laura Hoy did not hold any of the aforementioned securities.
