JD.com (NASDAQ:JD) is sitting on the cusp of a potential breakout. That’s not the first thing that many fundamental investors like to hear. Instead, they want to read about a compelling valuation or an acceleration in free cash flow. I’ve hit many roadblocks in the investment world — as has everyone — but I’ve always found it best to marry fundamentals and technicals.
That way we’re not relying purely on the charts, like putting lipstick on a pig. Likewise, we’re not buying into a value trap that’s got a poor technical setup.
Blending fundamentals and technical analysis can give us the best of both worlds. In the case of JD stock, we’re looking at a continuously improving technical situation. We discovered the same thing with Alibaba (NYSE:BABA) just a few days ago too.
That makes JD a good name for traders. However, if the fundamentals continue to improve for JD.com, it may make it attractive for longer-term investors too.
How to Trade JD.com
Shares of JD.com are setting up in what’s known as an ascending triangle formation. That’s a bullish technical pattern where rising uptrend support (blue line) squeezes the stock higher up against a static level of resistance (black line).
In this case, that resistance level is around $32. Each time JD stock hits this level it retreats. However, the dips from $32 keep getting more and more shallow. In other words, JD is putting in a series of higher lows.
The good news is that we have a very binary setup. Meaning that JD.com will either break out and run higher, or it will break down below support and the setup will fail.
In the case of the former, we need to see a close north of $32. That will set the stage for a potential move higher. Over $32.30 — above the July and August highs — JD stock can really start to run.
However, should $32 resistance prove too strong and support gives way, we need to know the downside levels too. In this case, a close below the 50-day moving average would be a bad sign. It would signal a breakdown in the bullish setup and suggest that more time is needed before JD.com can continue higher.
In this case, a drop below $30 is certainly possible, with the 200-day moving average being a possible downside target below that.
The short version? Look for a breakout over $32 on the upside. On the downside, watch for a move below the 50-day.
Evaluating JD Stock
The hardest part about JD.com stock is the trade war. It’s a threat that looms over many of its peers, Alibaba included. But it also includes iQiyi (NASDAQ:IQ), Baozun (NASDAQ:BZUN), Baidu (NASDAQ:BIDU) and others. One tweet can completely change the dynamic for this group and severely alter sentiment. Unfortunately, that’s just a risk that’s in these stocks at this point.
For JD stock, analysts are forecasting revenue to grow 16% this year and accelerate to 17% growth next year. On the earnings front, estimates call for 150% growth this year to 90 cents per share and 34% growth next year to $1.21 per share.
With these current estimates in hand, JD.com trades at about 26 times this year’s earnings. At that valuation, I would rather be long Alibaba on a fundamental basis. The stock has better revenue growth and a lower valuation, with a similar bullish setup on the charts.
That’s not a slight at JD.com, but a simple observation.
JD.com is not a bad company, nor does it have an egregious valuation given its expected earnings growth this year. Further, it has superior earnings growth forecasts against Alibaba both this year and next year. But head to head versus Alibaba, and the bigger company looks more attractive overall.
That said, let’s see if JD.com can breakout over $32 and gain momentum from here. If it can, it may be worth a look on the long side.