Despite the negatives, JD.com (NASDAQ:JD) managed to blow away critics last week with a fantastic earnings report.
Everyone knows the current economic situation in China is rather unfortunate. The trade war with the United States keeps getting worse and worse. The Yuan recently broke below 7 and appears to be on the cusp of a significant devaluation. And the protests and uncertainty in Hong Kong keep intensifying. All in all, investors have a lot of jitters around Chinese stocks.
That only makes it more amazing that the earnings release sparkled from top to bottom, with the company beating on revenues, earnings, and a lot of details that we’ll get into. JD stock took off, rising 15% in the days following the earnings report.
Will the good times keep up? There’s obviously still the macroeconomic concerns that aren’t going anywhere anytime soon. And at least one plus from this earnings report isn’t likely to last forever. Still, the central bearish thesis on JD stock has now been invalidated. The company can continue to grow rapidly while also delivering rising profit margins.
A Fantastic Quarter
JD stock rocketed up last week, and with good reason. The company’s latest earnings report was simply amazing. It beat on revenues by nearly a billion dollars for the quarter, posting $21.9 billion against expectations of just $21 billion. That resulted in a far faster than expected year-over-year revenue growth rate of 23%.
Incredibly, with revenues shooting up, JD also managed much higher profit margins. Non-GAAP earnings of 33 cents per share utterly blew away analyst expectations of just eight cents per share. Now, to be fair, some of this was due to a tax benefit that may not continue in the coming quarters. But a good chunk of it is simply from JD earning higher margins; this was their best operating margin in more than two years, in fact.
The market had gotten the idea that JD was essentially paying for growth. When it wanted to post faster growth, it would up marketing spend or discount big-ticket items like electronics, thus whacking its profit margin.
This quarter demonstrated that the bears appear to be wrong. The company’s efforts to build scale and exploit its large competitive advantage in logistics is starting to pay off with durable operating results.
JD Profit Expectations
I own JD stock and have been involved for quite a while. As a result, I’ve seen both the company’s up and down quarters. Unfortunately, a lot of investors don’t seem to be that familiar with the CEO’s growth strategy and thus extrapolate too much out of one or two quarter’s of results.
In the past, whenever JD announces a big quarterly profit, people assume that EPS is going to shoot up. Similarly, when margins go down, everyone starts panicking.
Both reactions are not well-founded. That’s because JD founder and CEO Richard Liu has repeatedly said that the company will reinvest profits back into the business. When profits go up, the company subsequently invests more in growth. Similarly, when profits slide, JD scales things back a bit.
Why adopt this sort of strategy? JD has clearly said from the outset that it wants to mimic Amazon (NASDAQ:AMZN). A key part of that company’s success was earning enough cash flow from operations so as to keep expanding without having to dilute the stock heavily or take on much debt.
However, Amazon never cared much about accounting earnings in its formative years. The bears repeatedly said AMZN stock was wildly overvalued because they looked for accounting profits. But the real thing to watch was cash flow and the ability to keep growing.
JD is running the same model. Whatever profits the company can make now are better put to use in expanding the business further. JD has a ton of competition both in China and in the other markets it is attempting to expand into. We’re in the early innings of JD’s growth story, so why should management get hung up on high reported profits now?
JD Stock Verdict
When you own JD stock, everyone wants to compare it to Alibaba (NYSE:BABA). And sure, Alibaba is still a much larger business than JD, but that’s more than reflected in the market caps.
Alibaba has a $460 billion market cap right now, and JD has a $46 billion market cap. Despite having only a tenth of Alibaba’s market value, JD actually does more in annual revenues than Alibaba. Additionally, JD has 321 million active customer accounts – that’s half of Alibaba’s figure and equal to the entire population of the United States.
Revenue is growing at more than 21% a year, margins spiked up and JD is guiding margins to be above 2017 levels through the end of the year (when the stock was up at $50). Meanwhile, JD’s new business lines are paying off, revenues there grew 70% year over year.
All this good stuff is happening, we must recall, during a major economic downturn in China. Get a trade deal with the U.S., and things turn even more interesting.
Long-term, if JD continues to execute, it’s easy to see a path to JD being worth $100 billion or more in the market, leading JD stock to a valuation of at least $65/share. If you want to invest in Chinese e-commerce, make sure to own JD stock before the trade war ends.
At the time of this writing, Ian Bezek owned JD stock. You can reach him on Twitter at @irbezek.