JD.com Has the Potential to Unseat Alibaba as ‘The Amazon of China’

JD.com (NASDAQ:JD) stock has seen a boost in the past two months month. Shares in the Chinese retail giant popped from the $25+ in early June to the $30+ range as of this writing. With tense U.S.-Chinese trade relations cooling, investor confidence in JD stock has improved certainly.

JD Stock Is a Buy, but Investors Should Wait for This

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Shares continue to trade a high valuation, driven by JD’s potential to challenge Alibaba (NYSE:BABA) and become king of Chinese e-commerce. But is there additional upside to the JD stock price here? Or should investors take caution, given that JD currently trades at a high valuation? Let’s take a deeper look, and see what is the verdict with JD.com stock.

Recent Performance

For the first quarter of 2019, sales grew 21% year over year. However, the company’s growth has slowed from prior years. The company saw a 50% compounded annual growth rate (CAGR) between 2012 and 2018. But with scale comes improved profitability. Gross margins grew from 10.8% in 2014 to 14.1% in 2018. For the first quarter of 2019, gross margins reached an all-time high of 14.8%. This is an 29% improvement over the prior year’s quarter.

What does this mean for the JD stock price? With the company scaled up, JD can ease off the gas pedal in terms of infrastructure investments. Coupled with pricing power and a diversification into related services, the company could see higher operating margins. This will justify the current valuation, and potentially lead to additional upside.

But what about Alibaba? What makes JD.com stock a better opportunity in terms of playing the Chinese middle class growth story? While Alibaba is king of the hill with regards to the Chinese retail market, JD.com could overthrow them as the “Amazon of China”.

JD.com Could Become The “Amazon of China”

Alibaba is the undisputed king of Chinese e-retail. BABA’s Tmall platform has a 61.5% e-Commerce market share. This leaves JD a distant second, with only 24.2% market share. But the differing business models of both companies could be key to JD’s future growth. Alibaba is primarily a marketplace. JD.com is more akin to Amazon (NASDAQ:AMZN), operating as both a retailer and as a third-party platform. As InvestorPlace contributor Will Healy recently wrote, JD.com continues to build out an extensive logistics infrastructure in China. This build-out is similar to what Amazon has successfully achieved in the United States.

But can JD.com overtake Alibaba to become the “Amazon of China”?

With a little help from some deep pocketed friends, they could give it a go. JD has been partners with Chinese conglomerate Tencent (OTCMKTS:TCEHY) since 2014. Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) and Walmart (NYSE:WMT) have made strategic investments as well. These partnerships provide opportunity for the company to leverage its market power both China and across the globe. But is the company getting ahead of itself? With heavy competition and geopolitical headwinds, there are many factors that could impact the JD stock price. With shares currently trading at a premium valuation, upside could be limited.

Risks to JD Stock Price

JD faces competition not only from Alibaba, but from low-cost retailers such as Pinduoduo (NASDAQ:PDD). While JD.com focuses on branded products, Pinduoduo could one day make a run for the company’s higher-end market. The U.S.-China trade war is a minor risk. Trade talks have resumed, but is tough to predict their future outcome. As JD.com CEO Richard Liu discussed last month, the trade war threatens the import of American-made goods into China. The trade wars remain a minor risk, likely already priced into shares.

Valuation is another risk to the JD stock price. Shares in the company trade at a forward price-to-earnings (P/E) multiple of 47.2. The company’s Enterprise Value to EBITDA (EV/EBITDA) ratio for the trailing twelve months is a stunning 74.3. While competitor Alibaba trades at a higher forward P/E (323), BABA trades at a lower EV/EBITDA ratio (31.9).

Is this EV/EBITDA premium to Alibaba justified? Entering the stock at such a high EBITDA multiple could be a risk. While the company could improve operating earnings once growth expenses cool down, much of the potential upside is already reflected in the stock price.

Bottom Line: Keep JD Stock on Your Radar

For investors looking to play the Chinese middle-class growth story, JD.com stock may be a strong investment idea. With their infrastructure build-out, along with the Alphabet and Walmart strategic partnerships, the company has a shot in overtaking Alibaba as the “Amazon of China”. While the trade war risk is still on the table, this geopolitical factor’s negative impact is likely priced into shares.

JD.com stock is overvalued. Investors have given the company a premium valuation in anticipation of earnings growth. With this mind, exercise caution before entering a position. With the next earnings report anticipated to be released in mid-August, it may clearer down the road whether JD stock’s current valuation is justified.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/jd-stock-better-buy-alibaba/.

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