Optimism has returned to JD.Com (NASDAQ:JD). After trade war fears sent JD stock reeling earlier in the summer, a robust quarterly report sent the equity charging back.
However, it has failed to move above certain levels, and the stock still rises and falls based on the market’s feelings about the trade war. Though JD should bring investor returns long term, investors should not buy at current levels.
In my previous article on JD, I urged investors to buy, but only after it sustained itself above the $31 per share price ceiling.
I was close.
The stock peaked at $32.33 per share before concerns over an economic slowdown sent the stock below $26 per share. However, earnings and revenue beats for Q2 quickly turned the equity around. Today, it trades at about $30 per share.
JD S Is Set to Move Higher
Without a doubt, JD.com has shown improvement, and not just on the revenue and earnings side. The non-GAAP operating margin rose from 0.1% in Q2 2018 to 2.1% in the latest quarter.
Free cash flow improved to about 18.27 billion RMB ($2.56 billion) up from 13.15 billion RMB ($1.84 billion) in the same quarter last year. Like Amazon (NASDAQ:AMZN) before them, JD.com invests heavily in logistics infrastructure. Hence, cash flows may reflect the performance of JD better than earnings.
I think this investment will give them a leg up over their larger rival, Alibaba (NYSE:BABA). However, this strategy led to years of losses for Amazon before it finally started turning massive profits. Still, despite these outlays, the company reports profits that continue to bolster JD stock.
Many of my colleagues have turned bullish on JD.com. Vince Martin finds “room and reason” for post-earnings gains to continue. Ian Bezek urges readers to “make sure to own” JD before the end of the trade war.
If that refers to the long term view on JD stock, count me as one of the bulls. JD.com trades at a forward price-to-earnings (PE) ratio of around 25.9. While not a low multiple, it seems reasonable for a stock expected to see 148.6% earnings growth in fiscal 2019 and 34.5% the next year. Its logistics, international expansions, and convenience stores will drive much of the increase.
Do Not Buy JD Yet
However, in the short run, I go back to what our own Dana Blankenhorn said about Nvidia (NASDAQ:NVDA), a company that derives almost 24% of its revenue from China. He stated that one should buy NVDA when Trump tweets negative things about China and sell when his rhetoric turns nice. I cannot help but think we could say the same thing about JD.com.
For now, Trump has turned friendly. Still, this rhetoric could turn on a dime and send JD.com back below $26 per share, where it traded before the Q2 earnings announcement. Hence, the current price leaves with my thesis from late July, save for the fact that I have to adjust my ceiling more to a “low $30s per share” range.
Unfortunately, all of the optimism has not yet taken JD stock beyond that level. Until investors can see that psychological barrier broken, or they can buy JD.com at a discount, I would recommend waiting.
When to Buy JD Stock
JD.com remains a long-term winner, but investors should wait. A blowout earnings report stoked optimism, and I think this report speaks to JD’s resilience amid a trade war. Many have turned bullish on the stock for this reason. I also remain a long-term bull.
However, JD stock could take a while to reap these benefits. Intense trade war rhetoric has sent JD.com down in recent months. Since we do not have a trade agreement in place, this could happen again. Moreover, it has not been able to move beyond the low-$30s per share range since the summer of 2018.
Investors should look for buy points with this equity. I think if JD can put the aforementioned price ceiling behind it, investors should profit.
If JD.com falls from these levels, the buy thesis changes. I would look for a retest below the $26 per share price range. Twice this summer, it has quickly bounced back from that level. If the rhetoric turns negative again, I think investors can get this price.
Whatever happens, I think JD.com will thrive regardless of the trade war. Investors should simply make sure to buy the stock at levels where they can prosper as well.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
